You are on page 1of 82

JOINT EXPERT STUDY ON

COMPETITIVENESS OF BATAM-BINTAN-KARIMUN

COMMISSIONED BY
THE SINGAPORE-INDONESIA JOINT WORKING GROUP ON “BATAM, BINTAN AND KARIMUN
SPECIAL ECONOMIC ZONES AND OTHER SPECIAL ECONOMIC ZONES”
(INDONESIA’S COORDINATING MINISTRY OF ECONOMIC AFFAIRS AND
SINGAPORE’S ECONOMIC DEVELOPMENT BOARD)

CO-AUTHORED BY:

PROFESSOR UMAR JUORO


MEMBER, NATIONAL ECONOMIC COMMITTEE (KOMITE EKONOMI NASIONAL) OF
THE REPUBLIC OF INDONESIA;

DR TAN KHEE GIAP & DR TAN KONG YAM


CO-DIRECTORS, ASIA COMPETITIVENESS INSTITUTE
LEE KUAN YEW SCHOOL OF PUBLIC POLICY, NATIONAL UNIVERSITY OF SINGAPORE

APRIL 2013
TABLE OF CONTENTS

PART 1: COMPETITIVENESS OF FREE TRADE ZONE BATAM, BINTAN,


KARIMUN (BBK)

BY:
PROFESSOR UMAR JUORO
MEMBER, NATIONAL ECONOMIC COUNCIL (KOMITE EKONOMI
NASIONAL), APPOINTED BY THE PRESIDENT OF REPUBLIC OF
INDONESIA;

PART 2: COMPETITIVENESS ANALYSIS FOR KEPULAULAN RIAU VIS-À-VIS 33


INDONESIAN PROVINCES AND INTEGRATED APPROACH TO
REVITALIZATION AND UPGRADING OF MANUFACTURING
COMPETITIVENESS OF BATAM, BINTAN & KARIMUN SPECIAL
ECONOMIC ZONES (BBK SEZs) WITH INDUSTRY-SPECIFIC FOCUS ON
ENTERPRISE SERVERS, STORAGE & NETWORKING SYSTEM (ESSNS),
CONSUMERS ELECTRONICS & ELECTRICAL COMPONENTS (CEEC)
SHIPBUILDING, SUPPORT EQUIPMENT FOR OIL AND GAS DRILLING
(SOG) CLUSTERS

BY:
DR TAN KHEE GIAP & DR TAN KONG YAM
CO-DIRECTORS, ASIA COMPETITIVENESS INSTITUTE
LEE KUAN YEW SCHOOL OF PUBLIC POLICY
NATIONAL UNIVERSITY OF SINGAPORE

NOTE:

THE FIRST DRAFT WAS ALSO PRESENTED AT THE SEMINAR ON “RELATIVE COMPETITIVENESS
AND REVITALIZATION OF BBK IN THE CONTEXT OF REGIONAL AND GLOBAL PERSPECTIVE”,
BINTAN, INDONESIA, 18 OCTOBER 2012.
 
PART 1: COMPETITIVENESS OF FREE TRADE ZONE BATAM,
BINTAN, KARIMUN (BBK)

BY:
PROFESSOR UMAR JUORO
MEMBER, NATIONAL ECONOMIC COUNCIL (KOMITE
EKONOMI NASIONAL), APPOINTED BY THE PRESIDENT
OF REPUBLIC OF INDONESIA
 
COMPETITIVENESS OF FREE TRADE ZONE BATAM, BINTAN,
KARIMUN (BBK)

Introduction
Batam, Bintan and  Batam has been a bounded zone to facilitate manufacturing export
Karimun were 
since 1986. Since then there have been several changes to develop
granted as Free 
Trade Zone in 2007  Batam as a growth center. Recently, Batam, Bintan, and Karium were
granted as FTZs (Free Trade Zone) in 2007. But only in 2009, the
apparatus for Batam, Bintan, and Karimun (BBK) FTZs were
completed. The FTZs law has been accompanied by government
regulation and minister decision for implementation. The most recent
regulation is PP No 10/2012 that gives four facilities namely additional
free port, free custom clearance, no "master list" for imported goods.

Batam has been able  The strategic location of BBK, in busy Strait Malacca and proximity to
to attract FDI in 
Singapore gives BBK an advantage to attract FDI (Foreign Direct
electrical and 
electronics, shipyard,  Investment). Batam has been able to attract FDI in electrical and
and supporting oil 
electronics, shipyard, and supporting oil and gas industry. Meanwhile,
and gas industry 
Bintan and Karimun are relatively new FTZs, so that no significant FDI
came to these locations yet, even though part of Bintan, Lobam area,
has been designated as bounded area for quite long time. With the
competition of FTZs in the region, BBK has to improve themselves to
make them attractive, otherwise investors do not have interest to invest
in BBK, and the existing investor might leave Batam..

The main obstacle of  The main obstacle of BBK development is institutional problems


BBK development is 
related to the work of authority and its working relationship with local
institutional 
problems  and national government. Unclear regulations discourage investors. In
addition, labor problem is serious issue. Although infrastructure is
adequate for Batam in the meantime, there a need for capacity
expansion in port and electricity. Bintan and Karimun in general do not
have adequate infrastructure.

PART 1 -- Page 1
 
This study addresses those institutional problems and the need for
infrastructure development, especially in Bintan and Karimun. This
study also develop a road map for competitiveness of electrical and
electronics industry, supporting oil and gas, shipyard, and the potential
data storage and network system.

FTZs BBK; regulation, infrastructure and investment.


The government  FTZ BBK formally launched in 2009 with three separate FTZs, namely
regulations in 2007 
Batam that relatively more developed, and three other FTZs, namely
stated the 
boundaries of FTZs  Bintan, Tanjung Pinang (also in Bintan) and Karimun. The government
Batam Bintan 
regulations in 2007 stated the boundaries of these FTZs. Neverthless,
Karimun 
Batam FTZ has been extended recently to include Janda Berhias island.

Figure 1: The map of FTZs BBK.

The authority is  FTZs is run by an authority that supposed to be professional and


supervised by Board 
of FTZ (Dewan 
independent. The authority is supervised by Board of FTZ (Dewan
Kawasan/DK) chaired  Kawasan/DK) chaired by Governor with vice chairman is related
by Governor 
mayor or head of district, and members from various institutions,
among other tax office, costum, police, and military. This membership
of DK is more as symbolic representatives than strategically needed.

Infrastructure in  Infrastructure in Batam is quite developed, except that Batam port is


Batam is quite 
developed, except 
not keep up with the growing of the economy. Infrastructure in Bintan
that Batam port is 
not keep up with 
the growing of the  PART 1 -- Page 2
 
economy 
and Karimun is lag behind and inadequate to attract investors Table 1
shows the general information of infrastructure condition in BBK.

Tabel 1 General Information of Infrastructure Condition in BBK

Figure 2: Composition of Investment in Batam (2011) Total US$ 14.9 billion.

The growth of  Batam has been able to attract FDI especially in electrical and
investment has not 
been high enough 
electronics, oil and gas supporting, and shipyard industries. However,
and lag behind  the growth of investment has not been high enough and lag behind
compare to its 
compare to its competitors, such as Penang, and Waigaoqiao in
competitors 

PART 1 -- Page 3
 
Shanghai. Recently Batam faces a serious competitor from nearby
Johor Iskandar Development. Figure 2 shows investment in Batam in
which 20.11 percent is government, and 41.31 percent is FDI. This
shows that FDI dominates investment in Batam. In 2011, FDI in Batam
was USD 6.16 billion. In 2012 FDI is around USD 7.2 billion.

Figure 3 shows Batam export mainly electrical machinery and


equipment (30 percent), followed by machinery and mechanical
appliances parts (17 percent), and ships, boats and floating structures
(11 percent).

Figure 3: Export’s Batam (2011)

FDI in Bintan and  FDI in Bintan and Karimun FTZs is still in early stage. In Bintan
Karimun FTZs is still 
practically investment that existed is the left from Lobam bonded zone.
in early stage 
In Karimun FDI started coming in shipyard. However, it still long
away to go for Bintan and Karimun to attract FDI significantly.
Figure 4 shows SWOT analysis for FTzs BBK. The strength is strategic
location, trade openness, labor availability, and strong relation with
Singapore. In order to develop as investment destination, FTZs BBK
should exploit its strengths as much as possible.

The issue of institutions and regulations


The main issue for  The main issue for development of BBK is related with institutions.
development of BBK 
Despite the law, government regulation, and minister decision are in
is related with  
institutions 
PART 1 -- Page 4
 
place, but the issue on custom related to import, especially on
consumption goods is problematic. This is a consequence especially for
Batam with FTZ status and population inside the FTZ. The concern
from custom is always about leaking imported goods to custom area
outside FTZ.

Figure 4: SWOT Analysis for FTZ BBK

FTZ BBK SWOT Analysis 2009-2012


STRENGTHS WEAKNESSES

Strategic location Lack of high-tech skilled labor.


Lack of integration between business
The existence of skilled labor
processes and application procedures.
Sound regional economic Conflicting policies between local
relationships within Indonesia government and central government.
Strong relationship with Singapore Lack of policy and infrastructure
International trade openness support to train local workers.
Urban population Low business creation.
Relatively high percapita income Limited availability of land for future
development
Limited basic infrastructure.
The absence of innovation industry
less than optimal Economic Growth
and Investment level
inefficient of Bureaucratic Process.

Massive capital inflow to


Indonesia
the Development of ASEAN more
significant as part of Global Competition from other industrial
economic growth engine zones especially in Johor Malaysia
The potential of Indonesia as a The Changing on Singapore's
center of shipping and logistics economic dynamism
Relocation companies due to The barriers on trade which
globalization discourage economic development
Relocation of industries due to
rising overhead costs in China

OPPORTUNITIES THREATS

There is also concern  There is also concern from investors for the need of tax holiday, as
from investors for 
other FTZs provide this facility. At this time the government does not
the need of tax 
holiday, as other FTZs  give tax holiday. However, the government selectively can give tax
provide this facility 
incentive for certain manufacturing that needs promotion.

PART 1 -- Page 5
 
The other important issue related to institution is the relationship
between the FTZs authority (BP) with central government. Chairman
of the authority is professional, former Chairman of Batam authority in
Batam (BIDA). Meanwhile, in other FTZs, the authority chairman are
local civil servant. Chairman of Board of FTZs (DK) is governor. This
is problematic in developing a good relationship with the central
government. There is no clear representation of central government in
the FTZ authority, nor at the board. There would be more effective if
there is synergy between local and central government in promoting
FTZs.
The relationship  The relationship between BP and DK also problematic, as DK tends to
between BP and DK 
intervene in practical issues, instead of just concentrated on strategic
also problematic, as 
DK tends to intervene  issues. The relationship between FTZ authorities with local government
in practical issues, 
is also problematic. Local government, whether city/district or
instead of just 
concentrated on  provincial tend to take control of any licenses that should be under
strategic issues 
fully control of the FTZ authority.
Under these institutional problems, FTZ authority cannot function
optimally, even for FTZ Batam that have been quite long time with the
FTZ/bounded zone status.
Labor problem
The labor issue is related to the trend of polarization in labor
The labor issue is 
related to the trend  movement. Demonstration is quite frequent. The main issue is on
of polarization  in  minimum wage and outsourcing. Actually for FDI in general, they do
labor movement 
not have problem with minimum wage, but demonstrations and strikes
influence their workers and cost the companies significantly. The local
government and security are not able to handle the labor strikes that
often out of control. This is certainly discouraged FDI.

PART 1 -- Page 6
 
Infrastructure development
Batam has adequate infrastructure for the time being, but to be able to
Batam needs 
improvement in  compete with other FTZs in the region, Batam needs improvement in
infrastructure, 
infrastructure, especially port, roads, and electricity.
especially port, 
roads, and electricity  Meanwhile, infrastructure in Bintan and Karimun are lag behind.
Certainly the capacity to build infrastructure is limited. For this reason
infrastructure development in Bintan and Karimun should be more
selective. Electricity is the main priority. Then, development or
expansion of port.

Benchmarking with other FTZs


The main  BBK has to compete with other FTZs in the region to attract FDI. The
competitors are 
Waigaoqiao in 
main competitors are Waigaoqiao in Shanghai China, Penang and
Shanghai China,  Johor Iskandar in Malaysia, and Tan Thuan in Vietnam. Table 2 shows
Penang and Johor 
comparison in characteristics, FDI, and labor. It shows that Batam is
Iskandar in Malaysia, 
and Tan Thuan in  losing its competitiveness as shown by FDI. Figure 5 shows incentives
Vietnam. 
for each FTZs. Almost all of FTZs provide tax holiday and various
other incentives.

Three main industries in focus


In this study the focus is on three main industries, namely electrical and
electronics, shipyard, oil and gas supporting industries. As a
prospective investment especially in Batam, is data storage, networking
system and enterprise server.

PART 1 -- Page 7
 
Table 2 Characteristics, FDI and Labor in FTZ China, Malaysia, Vietnam and BBK Indonesia

PART 1 -- Page 8
 
Figure 5: Incentive for FTZ in China, Malaysia, Vietnam and Indonesia

PART 1 -- Page 9
 
Electrical and electronics industry
The labor issue is  Electrical and electronics industry has been developed for quite long
related to the trend 
time in Batam. Electrical and electronics is also the main export from
of polarization  in 
labor movement  Batam. The main electronics export from Batam is PC board, standard
components.
As global supply chain is changing, electronic products from Batam
cannot compete and many products are obsolete. Adding with labor
problem, this makes electronic industry in Batam lag behind the global
value chain. The existing industry is not willing to transform its
competitiveness, while new investors are still not sure to invest in

The opportunity for  BBK.
Batam to follow  The opportunity for Batam to follow global value chain of electronics
global value chain of 
electronics is  is enormous. Given the value of electronic market in amount of around
enormous  USD 10. 2 trillion in 2011, Batam can take a lot of benefit in it. Figure
6 shows the value chain of electronic industry. Data processing and
telecom are dominating electronic industry. Table 3 shows the strategy
for global electronic competition. Table 4 shows main market,
production, and leading firm of electronics producers. Table 5 shows
five top electronics manufacturers. Figure 7 shows SWOT analysis for
electronics industry in Batam.
For Batam, and next Bintan, it is important to attract investors in EMS
main players to locate here. This would put right a way Batam in the
global supply chain.

Figure 6: Value Chain of Electronics Industry

Table 3 Strategy for Global Electronics Competition

PART 1 -- Page 10
 
Table 4 Main Market, Production and Leading Firm of Electronics Procedures

Table 5 Five top Electronics manufacturers

PART 1 -- Page 11
 
The shipyard industry
Shipyard industry has been quite developed in Batam. The shipyard
industry consists of small and medium sized shipyard that produce
mainly tug boat and barge for domestic uses. The high growth of CPO
and coal production support the high growth of this type of shipyard in
Batam. As commodity export is declining, it impacts the shipyard.

PART 1 -- Page 12
 
Figure 7 SWOT Analysis Electronics Industry in Batam

The second type of shipyard is producing a large scale ship that mainly
for export market. As wage is increasing and demand for ships has
shifted to Asia, many shipyards are relocating to Asia, including Batam
for lower cost and close to markets.
The nature of shipyard industry is cyclical. For this reason the company
should be prepared to deal with cyclicallity. The small and medium
companies usually face difficulties in dealing with this cyclicality.
Figure 8 shows the global supply chain of shipyard industry. Figure 9
shows the value of shipyard industry in the world around USD 1.9
trillion, while in Indonesia only capture USD 13.5 billion in 2011.
Figure 10 shows the SWOT analysis of shipyard in Batam.

PART 1 -- Page 13
 
Figure 8 Global Supply chain of Shipyard Industry

Figure 9: the Value of Shipyard Industry

PART 1 -- Page 14
 
Figure 10 SWOT Analysis of Shipyard in Batam

The interest of shipyard is to optimize production facilities, capital


spending efficiencies, minimizing cost of manufacturing, and to
maximize production efficiencies. This interest should be in line with
the strength of Batam, and also Karimun, to attract shipyard to locate
there.
Batam can grow as one of center of shipyard in Asia. As coastal area in
Batam is no longer available for new investor in shipyard, Karium can
play additional role as destination for shipyard investment. At this time
Saipam, an Italian shipyard, has started its activity in Karimun.

PART 1 -- Page 15
 
Oil and gas supporting industry
Batam has been known as center for oil and gas supporting industry.
Starting from pipe production up to oil platform in deep sea have been
produced in Batam. Figure 11 shows the global supply chain of oil and
gas supporting industry. Figure 12 shows the value of oil and gas
supporting in the world and Indonesia.

Figure 11 The Global Supply Chain of Oil-Gas Supporting Industry

Figure 12 the Value of Oil-Gas Supporting in the World and Indonesia

PART 1 -- Page 16
 
Data storage and networking system
The activity of data storage and networking in Batam is still in the early
stage. Practically only BP IT Center that offers data storage services.
At this time the IT center provide services for government related
institution.
Figure 14 shows the global supply chain for data storage and
networking. Batam has large potential to develop data storage and
networking activity for private as well as public sector. There would be
more companies to relocate its data storage in Batam for lower cost,
strategic and secure location from major natural disaster.

Figure 14 The Global Supply Chain for Data Storage, Networking system and
enterprise server

PART 1 -- Page 17
 
Policy recommendations
1. In order to synergize the role of central and local government in
development of FTZ and to strengthen the role of FTZ authority, it is
important to put central government representative at DK (Board). It is
proposed by this study for co-chairmanship of DK, namely governor
and line ministers, such as Minister of Industry, so that DK would play
important role in bridging FTZ authority with central and local
government. Both co-chairman are appointed by the president.
Meanwhile, members of DK should be limited to related mayor/head
of district and several professionals.
2. Meanwhile, for the authority (BP), the job is for the professional with
high qualification not only national, but also international standard.
This is very important to be able to put BBK at par with its FTZs
competitor. It needs a presidential decree for appointment of Chairman
of BP, so that he/she gets high recognition.
3. The cooperation between BP and local government should be
improved. Investors are discouraged with too much bureaucracy and
red tape. It should be just BP that handles investor at FTZ and one roof
policy should be implemented seriously.
4. It is necessary to consider share of revenues between BP and local
government, in order to strengthen local government support for the
success of FTZs.
5. Labor problem should be tackled seriously. It is the responsibility of
the government to handle out of control labor demonstration and
strikes that jeopardize the continuation of production. Minimum wage
should increase gradually adjusted with the order transition at the
company level. Meanwhile, minimum wage should rely on bilateral
negotiation between labor union and employer association
(APPINDO), not unilaterally by local government that take the
pressure from politically motivated labor union.
6. Infrastructure development is needed in BBK. For Batam is port
development, and expansion capacity of electricity. For Bintan and
Karimun is electricity and port expansion.

PART 1 -- Page 18
 
7. Tax holidat should be provided for selected industries that is important
for FTZ development. Electronics, shipyard, and oil-gas supporting
industries should eligible for tax holiday. This would put BBK at par
with FTZs competitor.
8. Batam has strong position to transform its electrical and electronics
industry and integrate into global value chain. In order to do so, it is
important to improve environment for investors to come especially the
top ESM (Electronics Services Manufacturing) that would like to
relocate its production to Batam.
9. Batam can be a center for shipyard in the region. The development of
shipyard industry should also be integrated to global value chain of
shipyard industry.
10. Batam role in oil and gas supporting industry can be increased by not
only maintaining the existing industry, but also in attracting investment
in higher content of technology in the industry and integrate into the
global value chain.
11. Karimun can develop as location for shipyard industry along with
Batam. As coastal area for shipyard in Batam is limited, so Karimun
can provide the location for the industry.
12. FTZ Bintan can develop as location for electrical and electronics
industry along with Batam.
13. Batam can open up for development of storage and network services.
This is new venture, but Batam has high potential for this to take
advantage relocation of data storage services.
14. There is a need for continuation and intensification of joint promotion
between Singapore and Indonesia to promote BBK as the location for
electrical and electronics industry, shipyard, oil and gas supporting
industry, and data base and networking services.
15. There is a need for training of skilled workers that improve
productivity in BBK.

PART 1 -- Page 19
 
Roadmap of development of electronics industry in Batam and Bintan

PART 1 -- Page 20
 
Roadmap for shipyard industry in Batam and Karimun

Roadmap for oil and gas supporting industry in Batam

PART 1 -- Page 21
 
Roadmap for data storage, and network system in Batam

PART 1 -- Page 22
 
PART 2: COMPETITIVENESS ANALYSIS FOR KEPULAULAN RIAU
VIS-À-VIS 33 INDONESIAN PROVINCES AND INTEGRATED
APPROACH TO REVITALIZATION AND UPGRADING OF
MANUFACTURING COMPETITIVENESS OF BATAM,
BINTAN & KARIMUN SPECIAL ECONOMIC ZONES (BBK
SEZs) WITH INDUSTRY-SPECIFIC FOCUS ON ENTERPRISE
SERVERS, STORAGE & NETWORKING SYSTEM (ESSNS),
CONSUMERS ELECTRONICS & ELECTRICAL
COMPONENTS (CEEC) SHIPBUILDING, SUPPORT
EQUIPMENT FOR OIL AND GAS DRILLING (SOG)
CLUSTERS

BY:
DR TAN KHEE GIAP & DR TAN KONG YAM
CO-DIRECTORS, ASIA COMPETITIVENESS INSTITUTE
LEE KUAN YEW SCHOOL OF PUBLIC POLICY,
NATIONAL UNIVERSITY OF SINGAPORE

*A paper commissioned by Economic Development Board (EDB), Singapore


and the first draft was also presentation at the Seminar on “Relative
Competitiveness and Revitalization of BBK in the Context of Regional and
Global Perspective”, Bintan, Indonesia, 18 October 2012.
 
POLICY PAPER OUTLINES:

PART I: INTRODUCTORY BACKGROUND: RISE AND FALL OF ECONOMIC


CENTERS AND PERIPHERIES IN ASIA, THE FLYING GEESE THEORY
OF ECONOMIC DEVELOPMENT AND IMPLICATIONS TO
INDONESIA & RIAU ISLANDS INCLUDING BATAM, BINTAN
KARIMUN SPECIAL ECONOMIC ZONES (BBK SEZs)
PART II: RELEVANT LESSONS FOR INDONESIA AND BBK SEZs ON
INDUSTRIAL UPGRADING: THE SINGAPORE EXPERIENCE
PART III: A PIONEERING EMPIRICAL STUDY ON RELATIVE
COMPETITIVENESS OF RIAU ISLANDS VIS-A-VIS 33 INDONESIA
PROVINCES, 2012 BY ASIA COMPETITIVENESS INSTITUTE (ACI)
PART IV: INDUSTRIAL UPGRADING MODELS AND ANALYSIS ON
REVITALIZING BBK SEZs WITH INDUSTRY-SPECIFIC FOCUS ON
ENTERPRISE SERVERS, STORAGE & NETWORKING SYSTEM
(ESSNS), CONSUMERS ELECTRONICS & ELECTRICAL
COMPONENTS (CEEC) AND SHIPBUILDING, SUPPORT EQUIPMENT
FOR OIL & GAS DRILLING (SOG) CLUSTERS.
PART V: FIVE CORE SUGGESTIONS FOR INTEGRATED INDUSTRIAL
UPGRADING AND REVITALIZING ECONOMIC DEVELOPMENT FOR
BBK SEZs, PERTINENT ISSUES TO BE ADDRESSED AND PROPOSED
URGENT REFORMS REQUIRED.

APPENDIX:
COMPARATIVE EVALUATION ON RELATIVE COMPETITIVENESS OF
REGIONAL SPECIAL ECONOMIC / INDUSTRIAL ZONES: A SWOT ANALYSIS AND
ROLE OF THE GOVERNMENT

PART 2 -- Page 1
COMPETITIVENESS ANALYSIS FOR KEPULAULAN RIAU VIS-À-VIS 33
INDONESIAN PROVINCES AND INTEGRATED APPROACH TO REVITALIZATION
AND ECONOMIC UPGRADING OF MANUFACTURING COMPETIVENESS OF
BATAM, BINTAN & KARIMUN SPECIAL ECONOMIC ZONES (BBK SEZs) WITH
INDUSTRY-SPECIFIC FOCUS ON ENTERPRISE SERVERS, STORAGE &
NETWORKING SYSTEM (ESSNS), CONSUMERS ELECTRONICS & ELECTRICAL
COMPONENTS (CEEC) SHIPBUILDING, SUPPORT EQUIPMENT FOR OIL AND
GAS DRILLING (SOG) CLUSTERS

PART I: INTRODUCTORY BACKGROUND: RISE AND FALL OF ECONOMIC


CENTERS AND PERIPHERIES IN ASIA, THE FLYING GEESE THEORY
OF ECONOMIC DEVELOPMENT AND IMPLICATIONS TO
INDONESIA & RIAU ISLANDS INCLUDING BATAM, BINTAN
KARIMUN SPECIAL ECONOMIC ZONES (BBK SEZS)

China and India have been the traditional economic centres which have prevailed through their
rise and fall over centuries. China and India, as one of the world’s leading economic centres,
declined rapidly since 1820 and 1700 respectively. Their economic decline coincided with the
rapid rise of Europe which peaked in 1913 and thereafter declining steadily since, followed by
USA which plateaued around 1995-2003. China as a re-emerging economic centre picked up
growth momentum since the economic reforms in the late 1970s and accelerated in pace after her
accession into the World Trade Organisation in 2002, pioneered by coastal provinces such as
Guangdong, Jiangsu and Zhejiang. Since 1990s, India too has regaining her growth momentum
albeit gradually including states such as Maharashtra, Delhi and Tamil Nadu (see Table 1).

The Japanese economy, as an outer periphery in Asia, had experienced rapid economic recovery
since 1960s, peaked in early 1990s and remained stagnated since. In early 1980s, East Asia
Newly industrialized economies (NIEs) including Hong Kong, Korea, Singapore and Taiwan, as
inner peripheries, went through rapid rise and maintaining still their competitiveness. ASEAN
economies including Thailand, Malaysia, and Indonesia also experienced unprecedented
economic expansion since 1980s, which was disrupted by the 1997 Asian financial crisis. With
China and India re-emerging as Asia’s economic power houses, concrete economic recovery in
these economies are insight especially for Indonesia which has recovered in full by 2005, which

PART 2 -- Page 2
has the potential to be the seventh biggest world economy by 2030 given her consistent and
nearly a decade long 6% economic growth per annum.

Under the flying-geese theory (FGT) of economic development, there exists a narrow window
of opportunity for ASEAN and Indonesia in particular, albeit a brief period of 5 to 10 years in
our assessment. Such golden opportunity arises from potential rreshuffling of production centers
due to rising wages in coastal provinces, higher land costs and political dynamics between China
and Japan currently taking place in factory of the world-China.
FGT refers to developed countries or economies through various approaches of global trading
effort and international investment channels to shift their manufacturing and labor intensive
industries to developing economies so as to achieve industrial sector restructuring and
technological upgrading.

Table 1: Relative Shares of Global Gross Domestic Product^ for Major Economies
(^Using PPP with the world as 100; *Estimated by Asian Macroeconomics Modeling Unit
at Lee Kuan Yew School of Public Policy, National University of Singapore; Source:
Maddison 2007)
1 1000 1500 1600 1700 1820 1870 1913 1950 1978 1995 2003 2015*
China 25.4 22.1 24.9 29.0 22.3 32.9 17.1 8.8 4.6 5.0 10.9 15.1 23.1
India 32.0 28.1 24.4 22.4 24.4 16.0 12.1 7.5 4.2 3.4 4.6 5.5 7.2
Japan 1.1 2.7 3.1 2.9 4.1 3.0 2.3 2.6 3.0 7.7 8.4 6.6 6.0
58.5 52.9 52.4 54.3 50.8 51.9 31.5 18.9 11.8 16.1 23.9 27.2 36.3
Europe 13.7 9.1 11.8 19.8 21.9 23.0 33.1 33.0 26.2 27.9 23.8 19.2 15.4
USA 0.3 0.4 0.3 0.2 0.1 1.8 8.9 18.9 27.3 21.8 20.9 20.6 18.5
Russia 1.5 2.4 3.4 3.4 4.4 5.4 7.5 8.5 9.6 9.2 2.2 3.8 5.2

Since the 1950s, USA shifted its steel production, textiles and traditional industries to Germany
and Japan so as to concentrate on development of semiconductor industry, communication,
electronic computers and other new technology intensive industries.

Between 1960s and 1980s, Japan and Germany shifted their relatively lower value-added labor
intensive and resource intensive industries to newly industrialized economies of East Asia
including Korea, Taiwan, Hong Kong and Singapore. Japan and Germany then concentrated on
precision engineering, chemical refinery, household appliances, automobiles and other higher
value-added technology intensive industries.

PART 2 -- Page 3
In the 1990’s, Americans, Europeans, Japanese and NIEs subsequently shifted their no longer
competitive industries to coastal provinces of China and ASEAN including Malaysia, Indonesia
and Thailand. Post-2000, FGT is currently taking place within the Mainland China where the
government is initiating policies to revitalize North-Eastern traditional industrial base, develop
further western and central regions of China by encouraging shifting those industries which are
high cost, labor and energy intensive industries and environmental unfriendly production
processes to be reorganized and relocated to less developed regions.

Since 2010, given the rapid rising cost of production in coastal provinces of China, and the
recent rising tension between China and Japan, there is a new wave of manufacturing relocations
from China to ASEAN.

In terms of Indonesia’s medium-term economic development objectives and positioning, her


potential of being a rising economic middle power by 2030 cannot be overlooked. Currently
Indonesia is in between the production-driven and investment-driven phase of economic
development. The share of services sector would increase in due cause with well calibrated
strategies and policy implementation. On average, Indonesia would achieve about 6.125% of
GDP growth per annum for the next four decades, 2010-2050.

Under an optimistic scenario and some assumptions, ACI at LKYSP forecasts the medium-term
growth path of Indonesia as follows:
2010 – 2015 6.5%
2016 – 2025 6.5%
2026 – 2035 6.0%
2036 – 2050 5.5%

On average, Indonesia would achieve about 6.125% of GDP growth per annum for the next four
decades, 2010-2050. Given the latest wave of manufacturing relocations from China in particular
by the Japanese and Taiwanese manufacturers to ASEAN, we estimated the narrow window of
opportunity for Indonesia and BBK in particular is about five years.

PART 2 -- Page 4
PART II: RELEVANT LESSONS FOR INDONESIA AND BBK SEZS ON
INDUSTRIAL UPGRADING: THE SINGAPORE EXPERIENCE

The Singapore experience in industrial upgrading, manpower development and education


policies

Singapore went through three basic stages of Industrial upgrading and stages of economic
development as follows:
(i) Factor of production-driven stage (us$300-1,000): Comparative advantage in labor
cost, rich natural resources availability and labor intensive production( garments, toys,
shoes and bags).
(ii) Investment-driven stage (us$1,000-10,000): Comparative advantage in capital
investment, economy of scale and capital intensive production (Steel production,
petro-chemical, electronics and automobiles).
(iii) Innovation-driven stage (us$10,000-40,000): Ideas, invention, creative innovation and
new products and services( Financial, entertainment, product development , life
sciences and branding)

As Singapore moved up the technological ladder into high value added manufacturing activities,
wages tend to rise correspondingly as international competition intensifies (see Chart 1). At the
Innovation - driven stage, as exhibited in the “value-added smiling curve”, up-stream activities
involving new product, innovation and product development and down-stream activities
involving branding, advertising and marketing tend to be remunerated better hence with higher
profit margins. Mid-stream activities which are associating with production of parts and
assembly tend to have the lowest profit margin (see Chart 2). As it is evident in the “Made-in-
China” retail pricing structure of a personal computer, ratio of retail pricing to production cost
tend to be higher for manufacturers who produced CPU, Monitor and Main Board, and agents
involving in marketing activities (see Table 2).

Industrial upgrading must be simultaneously planned with investment in technical education of


higher learning. Over the period from 1975 to 1985, Ministry of Education took charge of the
expansion of polytechnics education and the development of advanced technicians and
engineering manpower. There was an urgency to train a critical mass of mid-level workers with
practical skills for business and industry. Collaboration in training program of Economic
PART 2 -- Page 5
Development Board with MNCs such as Philips, ABB and Seiko were forged. National
industrial training institutes of French, Japan and German origin were set up. Significant effort
by the government was to focus on promoting industrially relevant manpower development

Chart 1: Technological Upgrading in Various Stages of Economic Development

Chart 2: Value-added Smiling Curve: Profit Margins versus Operating Processes

PART 2 -- Page 6
Table 2: “Made in China” retail pricing structure of a personal computer

Product Manufacturer Manufactured Ratio of retail pricing


Location to production cost
(%)
CPU Intel USA 10
Monitor GIGA Taiwan 8
Main Board AOC Taiwan 10
Hard disk Quantum USA 6
Storage KINGMAX Taiwan 5
CD Rom SAMSUNG South Korea 5
Video Card CREATIVE Singapore 5
Sound card CREATIVE Singapore 4
LAN Card 3COM USA 1
Marketing ----- ----- 10
margin
Others ----- ----- 37
Total ----- ----- 100

In terms of manpower development policy, Singapore set up Skilled Development Fund (SDF) in
1979. Skill upgrading is paramount to support industrial upgrading and addressing structural
unemployment. Levy of 1% of employees’ remunerations were imposed on lower skilled
workers. Cost sharing models was proposed and the nature of training was determined by
employer-based skills upgrading. Advisory committee comprising of private industry, union and
government were formed. A total of 8 million training places were created amounting to $1.6
billion in expenses to help facilitate technological restructurings and promote lifelong learning.

The government took advantage of higher land prices during the phase of rapid economic
development. Land appreciation gain leads to budgetary surpluses which were used by the
government to finance education, manpower development, talent attraction, public servants pay
increases. However, Singapore learnt a hard and expensive lesson in 1986 when the economy
went into a severe recession caused by artificial lump sum positive wage adjustments for public
sector in the early 1980s) which snowed ball to private sector too, coupled with exchange rate
appreciation and other cost increases. The painful lesson learnt is that pace of industrial
upgrading should be in line with ability of enterprises to adjust.

PART 2 -- Page 7
PART III: A PIONEERING EMPIRICAL STUDY ON RELATIVE
COMPETITIVENESS OF RIAU ISLANDS VIS-A-VIS 33 INDONESIA
PROVINCES, 2012 BY ASIA COMPETITIVENESS INSTITUTE (ACI)

Background Information:
Governor: Drs. H. Muhammad Sani (Since August 2010)
Capital: Tanjung Pinang
Land Area: 8,201.72 square kilometres
Population: 1,679,163 (2010)

Map of Province

Source: http://www.bakosurtanal.go.id/bakosurtanal/peta-provinsi/

PART 2 -- Page 8
Abbreviations

ACI Asia Competitiveness Institute


ASEAN Association of Southeast Asian Nations
BIFZA Batam Indonesia Free Zone Authority (also known as Badan Pengusahaan
(BP) Batam
BBK Batam-Bintan-Karimun (usually with reference to the BBK Special
Economic Zone)
GDP Gross Domestic Product
GRDP Regional Gross Domestic Product (‘Regional’ refers to province. Figure is
based on constant price of year 2000, unless otherwise noted)
HDI Human Development Index
HRD Human Resources Development
ICT Information and Communications Technology
MP3EI Masterplan Percepatan dan Perluasan Pembangunan Ekonomi Indonesia
(Master Plan for the Acceleration and Expansion of Indonesian Economic
Growth)
MRO Maintenance, Repair, Overhaul
MW Mega Watts
PELINDO PT PELabuhan INDOnesia (Port of Indonesia Ltd.)
PERTAMINA Perusahaan Pertambangan Minyak dan Gas Bumi Negara (the state-owned
Oil and Natural Gas Mining Company)
PLTA Pembangkit Listrik Tenaga Air (Hydroelectric Power Generator)
RPJM Rencana Pembangunan Jangka Menengah (Medium Term Development
Plan)
SEZ Special Economic Zone
SWOT Strength Weakness Opportunity Threat
RESPEK Rencana Strategis Pengembangan Kampung (Village Strategic
Development Plan – a block grant programme from the Papua province
government to villages in Papua)

PART 2 -- Page 9
Abstract
This working paper explores the challenges and responses of the province of Kepulauan Riau in
economic development as Indonesia1 joins other emerging economies and assuming its rightful
competitive place in ASEAN10. In Section 1, an introduction and background to the province
including major economic sectors and infrastructure are presented. Section 2 assesses relative
competitiveness with analyses of median and maximum competitiveness and strength-weakness-
opportunity-threat (SWOT). In Section 3, the policy themes from official policy of the province,
a simulation what-if competitiveness analysis and development strategies are deliberated. Finally,
Section 4 concludes this policy brief.

SECTION 1: INTRODUCTORY NOTES AND BACKGROUND

1.1 Background and introduction

Kepulauan Riau (Riau Islands or Riau Archipelago) was established as a province in 2004 by
way of separation from Riau province. It has an area of 252,601 square kilometres, which is
mostly (96%) made up of water. The remaining 4% of the province’s area is made up of more
than 2,400 islands, 30% of which are unnamed and uninhabited.

The archipelago stretches from southern tip of Malacca Strait, just 30 kilometres south of
Singapore, to the southern parts of South China Sea, in between mainland and Borneo Malaysia.
The province borders Malaysia, Singapore, and Riau to its west, Bangka Belitung and Jambi to
its south, Malaysia, Brunei Darussalam, and Kalimantan Barat to its east, and Vietnam and
Cambodia to its north.

Kepulauan Riau is made up of five rural regencies and two urban municipalities (cities). The two
cities are Batam and Tanjung Pinang (the province’s capital, located on Bintan island). Five rural
regencies are Bintan, Karimun, Natuna, Anambas, and Lingga. Population is 1,679,163 as per
Census 2010. More than half of population live in Batam, and many of them are migrants from
other parts of Indonesia, looking for economic opportunities in the island.

1
Collating and drawing from Asia Competitiveness Institute’s intensive and detailed ACI Working Papers on each
33 provinces, an overall paper on Indonesia is prepared as for each ASEAN economies as well.

PART 2 -- Page 10
Three most notable islands in Kepulauan Riau are arguably Batam, Bintan and Karimun, which
are just a 45-minutes ferry ride towards the south of Singapore. The stretch of water between
Singapore and these three groups of islands forms the southern gate of Malacca Strait, one of the
world’s busiest shipping routes.

Another notable part of Kepulauan Riau is the Natuna Islands, located on the far northern part of
the province on the South China Sea. The Natuna Islands are blessed with natural gas fields,
currently operated by, among others, Conoco and Premier Oil. The Natuna Islands are connected
to Singapore via a 650-kilometre sub-sea gas pipeline which carries gas from the former to the
latter.

Batam was first developed in the 1970s as logistics centre for Indonesia’s national petroleum
company, Pertamina. Since then, it has been managed as bonded zone and subsequently an
industrial zone by an authority directly under the national government. The Batam model of
industrial development was decided to be expanded to other areas in Kapulauan Riau. In 2006, a
Memorandum of Understanding (MoU) between Singapore and Indonesia established major
areas of Batam, Bintan and Karimun (BBK) as a Special Economic Zone (SEZ).

This was then strengthened by Indonesia Law no. 44/2007, which gives incentives for trade
between BBK SEZ and Singapore. Such incentives are elimination of import and export duties,
as well as value-added and luxury taxes. The law also stipulates fast customs processing, one-
stop service to process licenses, friendly immigration and labour policies, and flexibility of
acquiring property for foreigners.

Level of development in different parts of BBK SEZ is varied. Batam is arguably the most
advanced in terms of infrastructure and investments, while others are trying to catch up.
Institutional issues in the development of BBK SEZ have also been highlighted. These include
some overlapping authority between the central, provincial, and local governments, as well as
central government commitment to invest in developing or improving major infrastructures such
as airports and seaports.

Table 1 shows Kepulauan Riau as a province at a glance. Indicators include area, gross regional
domestic products (GRDP), population, GRDP per Capita, resources, human resources
development (HRD) and poverty rate.
PART 2 -- Page 11
Table 1. Kepulauan Riau Province: Basic economic indicators

A. Population 2010
Total Population 1,679,163
% urban 82.83

B. Area 2010
Square kilometres 8201.72
% equivalent to country 0.43

C. GRDP: 2005 2010

Rupiah (million) 30,381,500 41,083,259

Rupiah (million) without oil & gas 28,559,848 39,357,160

Rupiah (million) without oil & gas & mineral 28,278,739 38,975,007

D. Economic composition, as % GRDP 2005 2010


Primary sector 15.27 13.09
Secondary sector 50.40 54.69
Tertiary sector 34.33 32.22

E. Primary products
Manufacturing and Processing, Cassava, and Corn

F. GRDP per capita: 2005 2010


Rupiah (million) 23.76 24.47
Rupiah (million) without oil & gas 22.33 23.44
Rupiah (million) without oil & gas & mineral 22.11 23.21

G. Poverty Rate 2005 2010


% population 10.97 8.05

H. Human Development Index 2005 2010


Index 72.20 75.07
Ranking 7 6
GRDP in Year 2000 Constant Price
Source: Statistics Indonesia and Interview Note (for part E)

PART 2 -- Page 12
1.2 Major sectors/activities

Province Name Major Sector Activities


Primary Oil and Gas, Tin, Granite, Fisheries, Rubber
Secondary Manufacturing industries
Tertiary Tourism, Trade, building and construction

Kepulauan Riau’s primary sector contributes about 13% to the province’s GRDP in 2010. This is
a relatively small number compared to Indonesia’s natural resource-rich provinces. Most of the
primary sector’s contribution is generated from oil and gas fields in Natuna regency in the South
China Sea. Building materials such as granite and sand also contribute to some of its exports.
There is much potential to develop the fisheries sector in the province, but it is of relatively small
contribution at the moment.

The province’s secondary sector is much more pronounced. Contributing around 60% of the
province’s GRDP in 2010, Kepulauan Riau — especially Batam — has long been recognised as
Indonesia’s main manufacturing centre. Batam has over 6,000 hectares of land accommodating
26 industrial parks, with more than US$13 billion investment is operated by about 900 foreign
companies. Some of the industrial parks are operated by Singaporean companies. Investment
from Singapore tops the list of foreign direct investment (FDI) in Batam.

Bintan also has manufacturing activities, with 4,000 hectares of land allocated for industries.
However, in Bintan, more emphasis is placed on tourism by allocating about 23,000 hectares.
Large tracts of land have also been allocated for industries in Karimum, but they are arguably
less developed than in Bintan and Batam. One of the most advanced industries in Karimun is
shipbuilding, with investments from Saipem and Sembawang, among others.

Kepulauan Riau is also quite known for its tourism industry. Bintan leads this sector with its
resort areas. Batam, as well as Karimun to a certain extent, also receives considerable number of
tourists, mostly from Singapore and Malaysia. Real estate is also a growing sector in Batam and
Bintan. With further economic growth in the province, trade and services are also expected to
grow.

PART 2 -- Page 13
1.3 Infrastructure

Infrastructure in Kepulauan Riau is quite established by Indonesia’s standard, considering


Batam’s long experience as bonded industrial zone. However, the province still needs to catch up
to reach international standard, especially if it wants to achieve success for the BBK SEZ.

The province’s seaports and airports are already struggling to serve with the economic growth of
the Batam, Bintan and Karimun. Inadequacy of container seaports is a common problem. If this
situation persists, accommodating future growth plans will be even harder considering these
current challenges. The province has only one international airport at Batam.

This makes travelling to different parts of the SEZ difficult as one has to fly to Batam and then
take the ferry to the other islands from Batam. Construction of another international airport in
Lagoi, Bintan Island, has just started in mid-2012. Karimun, on the other hand, is still waiting for
central government’s support to build its international airport. Currently, its 900-metre runway is
enough only to accommodate small plans. The plan is to extend the runway to 1,500 metres by
the end of 2013.

In sea transportation, Batam has four international ferry terminals and three cargo terminals,
Bintan has three international ferry terminals and two cargo terminals, while Karimun has two
international ferry terminals and two cargo terminals. Compared to Batam and Bintan, the
seaports of Karimun are still underdeveloped. Similar capacity-building is envisaged for
Karimun’s seaport (currently only 17 metres deep versus 35 metres needed).

So far, since support from central government has been limited. Karimun has been largely using
its own budget for infrastructural projects such as new roads. Overall, leadership of the regency
laments several obstacles in attracting more FDI, such as unreliable electricity supply, and lack
of international airport as well as deep-sea ports. Deficient electricity is also claimed by some
businesses in Batam as hampering their operations.

PART 2 -- Page 14
SECTION 2: RELATIVE COMPETITIVENESS OF PROVINCES

In the following set of tables below, the relative ranking of 33 provinces comprises ranking by
overall competitiveness and by four environments, each with their three sub-components, as per
Asia Competitiveness Institute (ACI) methodology:
1) Overall Competitiveness
2) Macroeconomic Stability
i) Regional Economic Vibrancy
ii) Openness to Trade and Services
iii) Attractiveness To Foreign Investors
3) Government and Institutional Setting
i) Government Policies and Fiscal Sustainability
ii) Institutions, Governance and Leadership
iii) Competition, Regulatory Standards and Rule of Law
4) Financial, Businesses and Manpower conditions
i) Financial Deepening and Business Efficiency
ii) Labour Market Flexibility
iii) Productivity Performance
5) Quality of Life and Infrastructure Development
i) Physical Infrastructure
ii) Technological Infrastructure
iii) Standard of Living, Education and Social Stability

To produce the 2010 Indonesian Provincial Competitiveness Index, ACI analysed 91 different
indicators.2 These indicators are measured in different units. For example, GRDP is measured in
millions of rupiah, while population is measured in number of people. To aggregate these
different indicators into a coherent index, ACI converted the actual indicator values for each
province into a "standardised score".

The standardised score measures how well a particular province performs in comparison to the
average-performing province. A standardised score of zero means that a province has exactly the
average score, in comparison to 33 Indonesian provinces. A negative standardised score means

2
For the Indonesian provincial level analysis, ACI used a total of 91 indicators, whereas in the national paper on
Indonesia as with the rest of ASEAN states, with more data available, a total of 128 indicators are used.
PART 2 -- Page 15
that the province performs below average, while a positive score indicates above-average
performance. The farther away the score is from zero, the farther it is from the average. Thus, a
larger negative number signifies lesser competitiveness, while a larger positive number is
reflective of higher competitiveness.

The standardised scores of indicators are averaged into an aggregate score for 12 sub-
components. The scores of the sub-components are then averaged to form an aggregate score for
four environments. Finally, the score (index) for Overall Competitiveness is derived by
averaging the standardised scores of the four environments.

PART 2 -- Page 16
2.1 Competitiveness Ranking of 33 Indonesian Provinces – Rank and Score by
Environment (Year 2010)

Table 2: Overall Competitiveness


Ranking Table 2 for Overall Competitiveness,
Rank Province Score
Kepulauan Riau is ranked at the 8th
1 DKI Jakarta 1.7576
2 Jawa Timur 0.6644 position, meaning that it can be considered
3 Kalimantan Timur 0.5523 as part of provinces within the “high
4 Jawa Barat 0.5113
5 Jawa Tengah 0.4282 competitiveness” group. The province
6 DI Yogyakarta 0.2757 performs slightly better than Bali, but
7 Banten 0.2343
8 Kepulauan Riau 0.1708 below Banten. These three provinces, in
9 Bali 0.1371 fact, obtained standardised scores which
10 Riau 0.1152
11 Sulawesi Selatan 0.0993 are not far off from each other (between
12 Sumatera Selatan 0.0816 0.2343 and 0.1371).
13 Kalimantan Selatan 0.0146
14 Sulawesi Utara -0.0259
15 Gorontalo -0.1130 Kepulauan Riau is healthily ahead of other
16 Aceh -0.1444 Sumatran provinces. Its closest neighbour
17 Sumatera Barat -0.1559
18 Sulawesi Tenggara -0.1655 and also parent province, Riau, stands two
19 Sumatera Utara -0.1683 ranks below at 10th place with a
20 Lampung -0.1956
21 Sulawesi Barat -0.2062 standardised score gap of 0.0556 points.
22 Kalimantan Barat -0.2273
23 Sulawesi Tengah -0.2311
24 Papua -0.2378 Kepulauan Riau’s Overall
25 Jambi -0.2506 Competitiveness is influenced by its four
26 Kalimantan Tengah -0.2681
environments. In three of the environments,
27 Bengkulu -0.2735
28 Nusa Tenggara Barat -0.2969 Kepulauan Riau maintains its rank in top
Kepulauan Bangka third of 33 provinces.
29 Belitung -0.3085
30 Papua Barat -0.3179
31 Maluku -0.3438 Most outstanding contrast, however is the
32 Maluku Utara -0.5107
Nusa Tenggara province’s attainment for Government and
33 Timur -0.6014 Institutional Setting where it rests at the
bottom third of the table of 33 province.

PART 2 -- Page 17
Table 3: Macroeconomic Stability
Ranking
Rank Province Score
In Table 3 for Macroeconomic Stability
1 DKI Jakarta 3.2084
2 Jawa Timur 0.9111 environment, Kepulauan Riau is ranked
3 Jawa Barat 0.9083 fifth. However, looking at the standardised
4 Kalimantan Timur 0.6212
5 Kepulauan Riau 0.3875 scores, for Kepulauan Riau to catch up, a
6 Jawa Tengah 0.2862 wide gap is visible between the province’s
7 Banten 0.2649
8 Bali 0.1384 score and that of Kalimantan Timur which
9 Riau 0.1354 is placed fourth.
10 Sumatera Utara 0.0246
11 Papua -0.1051
12 Kalimantan Selatan -0.1147 At the same time, the province edges only
Kepulauan Bangka
slightly ahead of Jawa Tengah at sixth
13 Belitung -0.1313
14 Jambi -0.1688 place.
15 Sulawesi Selatan -0.1794
16 Sumatera Selatan -0.1842
17 Lampung -0.1864 Nevertheless, the archipelago may be seen
18 DI Yogyakarta -0.2399 to be most stable in the Sumatra Economic
19 Papua Barat -0.2511
20 Sulawesi Utara -0.2518 Corridor. It is four ranks ahead of Riau,
21 Kalimantan Tengah -0.2701 the next highest placing province within
22 Nusa Tenggara Barat -0.3000
23 Maluku -0.3003 the corridor.
24 Kalimantan Barat -0.3531
25 Sumatera Barat -0.3733
26 Maluku Utara -0.3765
27 Gorontalo -0.3925
28 Sulawesi Barat -0.3981
29 Nusa Tenggara Timur -0.4298
30 Bengkulu -0.4402
31 Sulawesi Tenggara -0.4602
32 Sulawesi Tengah -0.4770
33 Aceh -0.5025

PART 2 -- Page 18
Table 4: Government and Institutional
Setting Ranking
Rank Province Score In Table 4, in contrast to other
1 DKI Jakarta 1.1541 environments where the province ranks in
2 Jawa Timur 0.6534
top one-third of 33 provinces, Government
3 Jawa Tengah 0.6016
4 DI Yogyakarta 0.5193 and Institutional Setting environment,
5 Banten 0.5031 Kepulauan Riau as a province is ranked
6 Sumatera Selatan 0.4398
29th, quite some distance down among 33
7 Sulawesi Selatan 0.4371
8 Gorontalo 0.4271 provinces. Comparing against provinces
9 Jawa Barat 0.3625 within Sumatra Economic Corridor, only
10 Sulawesi Utara 0.2574
Sumatra Utara is ranked lower than
11 Kalimantan Selatan 0.2435
12 Sulawesi Barat 0.2303 Kepulauan Riau.
13 Aceh 0.1396
14 Sulawesi Tengah 0.0478
15 Sulawesi Tenggara 0.0181
16 Bali 0.0061
17 Kalimantan Timur -0.0068
18 Kalimantan Barat -0.0738
19 Nusa Tenggara Barat -0.1249
20 Bengkulu -0.1314
21 Lampung -0.2175
22 Papua -0.2407
23 Sumatera Barat -0.2452
24 Kalimantan Tengah -0.3433
25 Jambi -0.3454
Kepulauan Bangka
26 Belitung -0.3558
27 Riau -0.4048
28 Papua Barat -0.4414
29 Kepulauan Riau -0.4536
30 Sumatera Utara -0.5447
31 Maluku Utara -0.6653
32 Nusa Tenggara Timur -0.6917
33 Maluku -0.7544

PART 2 -- Page 19
Table 5: Financial, Businesses and
Manpower Conditions Ranking
Rank Province Score Table 5 for Financial, Businesses and
1 DKI Jakarta 1.3993 Manpower Conditions, in contrast to the
2 Kalimantan Timur 0.9566
government sector, Kepulauan Riau as a
3 Jawa Timur 0.8620
4 Jawa Tengah 0.7087 province is ranked ninth. This is an
5 Jawa Barat 0.6432 indication of a strong private sector
6 Riau 0.5555
leading competitiveness drive of the
7 Papua 0.1643
8 Sumatera Selatan 0.1235 province.
9 Kepulauan Riau 0.0540
10 Lampung -0.0323
However, a closer observation on the
11 Maluku -0.0495
12 Sulawesi Selatan -0.0645 scores shows a fairly large gap between
13 Bali -0.0778 Kepulauan Riau with Sumatera Selatan,
14 Kalimantan Barat -0.1052
another province within the Sumatera
15 Sumatera Barat -0.1208
16 Sulawesi Tenggara -0.1267 Economic Corridor, which is ranked a
17 Papua Barat -0.1465 notch higher.
18 DI Yogyakarta -0.1720
19 Sulawesi Barat -0.1739
20 Gorontalo -0.1797 This would group Kepulauan Riau (0.0540)
21 Sumatera Utara -0.1806 within the same band as another
22 Banten -0.1838
neighbouring province, Lampung (0.0323)
23 Aceh -0.2005
24 Sulawesi Tengah -0.2495 and maybe even, Maluku (0.0495).
25 Kalimantan Tengah -0.2868 However, among archipelagic provinces
26 Bengkulu -0.2906
(Bali, Kepulauan Bangka Belitung,
27 Kalimantan Selatan -0.2954
28 Nusa Tenggara Barat -0.3086 Kepulauan Riau, Maluku, Maluku Utara,
29 Jambi -0.3297 Nusa Tenggara Timur & Nusa Tenggara
30 Sulawesi Utara -0.3552
Barat), Kepulauan Riau takes the lead
31 Maluku Utara -0.4830
Kepulauan Bangka indicating astrong confidence and viability
32 Belitung -0.5167
by the private sector.
33 Nusa Tenggara Timur -0.5380

PART 2 -- Page 20
Table 6: Quality of Life and
Infrastructure Development Ranking
Rank Province Score In Table 6 for Quality of Life and
1 DKI Jakarta 1.2684 Infrastructure Development, Kepulauan
2 DI Yogyakarta 0.9952
3 Kepulauan Riau 0.6953 Riau as a province is ranked third, just
4 Kalimantan Timur 0.6381 after DI Yogyakarta at second place and
5 Bali 0.4818
6 Banten 0.3528 DKI Jakarta at first place. This is no mean
7 Sulawesi Utara 0.2462 feat. While any attempt to push further the
8 Jawa Timur 0.2310
attainment in this environment may not
9 Kalimantan Selatan 0.2249
10 Sulawesi Selatan 0.2038 place the province higher up the ranks, it
11 Riau 0.1749
will definitely strengthen its competitive
12 Jawa Barat 0.1311
13 Jawa Tengah 0.1161 position as an attractive draw for its
14 Sumatera Barat 0.1156 residents to stay and take advantage of the
15 Sumatera Utara 0.0276
16 Aceh -0.0142 many presenting opportunities. This is
17 Sumatera Selatan -0.0526 especially important considering that
18 Sulawesi Tenggara -0.0932
19 Jambi -0.1584 Kalimantan Timur only slips narrowly in
20 Kalimantan Tengah -0.1723 fourth placing behind Kepulauan Riau.
Kepulauan Bangka
21 Belitung -0.2303
22 Bengkulu -0.2318 Being in close proximity to Singapore and
23 Sulawesi Tengah -0.2455
Johor Bahru, Malaysia, the province has
24 Maluku -0.2710
25 Gorontalo -0.3070 done well to level up with the more
26 Lampung -0.3463 established provinces in first and second
27 Kalimantan Barat -0.3769
28 Papua Barat -0.4327 placing.
29 Nusa Tenggara Barat -0.4543
30 Sulawesi Barat -0.4830
31 Maluku Utara -0.5181
32 Nusa Tenggara Timur -0.7460
33 Papua -0.7695

PART 2 -- Page 21
2.2 Analyses of Median and Maximum Competitiveness Webs

So as to better understand Kepulauan Riau’s relative strengths and weaknesses, it is useful to


compare and contrast the province’s attainment against the median and the maximum scores
of Indonesia’s 33 provinces for the 12 sub-environments that make up the four environments
above. The median competitiveness web plots Kepulauan Riau’s attained scores for each of
the 12 sub-environments.

Figure 1: Median Competitiveness Web Analysis: Kepulauan Riau

Regional Economic
Vibrancy
Standard of Living, 5 Openness To Trade and
Education and Social… 4 Services
3
Technological Attractiveness To Foreign
2
Infrastructure 1 Investors
0
-1 Government Policies and
Physical Infrastructure -2
Fiscal Sustainability

Institutions, Governance
Productivity Performance
and Leadership
Competition, Regulatory
Labour Market Flexibility
Standards and Rule of Laws
Financial Deepening and
Business Efficiency

Median Kepulauan Riau

In the Median Competitiveness Web chart (Figure 1), the median scores for 33 Indonesian
provinces are shown in the red line, while the score for Kepulauan Riau is shown in the green
line.

Kepulauan Riau’s Overall Competitiveness ranking places it at eighth within the top third of
33 provinces. Within the Sumatra Economic Corridor under the national economic
masterplan (MP3EI), Kepulauan Riau takes the lead. Indeed, Kepulauan Riau performs
relatively well in all four environments except for Government and Institutional Setting
environment where Kepulauan Riau resides at the opposite end of the table.

PART 2 -- Page 22
From Figure 1 comparing Kepulauan Riau’s attainment in green and the median scores for
each of the 12 sub-environments in red, the province has a fairly strong outward preparedness
with a strong Productivity Performance, Technological Infrastructure, Standard of Living,
Education and Social as well as Openness to Trade and Services.

However, a general outlook of preparedness and readiness has to be complemented with an


ease of access to services necessary to sweeten the investment climate. Faring rather poorly
for sub-environments in the bottom right quadrant of Figure 1 reveal implement the need for
the provincial government to necessary strategies and policies to improve its performance to
effectively compete within Indonesia and ASEAN as well.

Figure 2: Maximum Competitiveness Web Analysis for Kepulauan Riau

Regional Economic
Vibrancy
Standard of Living, 5 Openness To Trade and
Education and Social… 4 Services
3
Technological Attractiveness To Foreign
2
Infrastructure 1 Investors
0
-1 Government Policies and
Physical Infrastructure -2
Fiscal Sustainability

Institutions, Governance
Productivity Performance
and Leadership
Competition, Regulatory
Labour Market Flexibility
Standards and Rule of Laws
Financial Deepening and
Business Efficiency
Max Kepulauan Riau

The Maximum Competitiveness Web chart (Figure 2) shows how far are the best scores for
each sub-environment in relation to a province’s scores. The maximum scores for 33
Indonesian provinces are shown in the brown line, while the score for Kepulauan Riau is
shown in the green line.

As a start, it is useful for Kepulauan Riau to observe the gaps between its own attained scores
for the 12 subenvironments and the maximum scores attained across the 33 provinces by the
PART 2 -- Page 23
top province for each sub-environment. Of the 12 sub-environments, Kepulauan Riau’s
attainment for Standard of Living, Education and Social is marginally under the maximum
attained by DI Yogyakarta.

While on the other extreme, Attractiveness to Foreign Investors displays the widest gap
followed by Government Policies and Fiscal Sustainability. An obvious wide gap may also be
seen in the province’s attainment for Labour Market Flexibility. While in every sub-
environment except Standard of Living, Education and Social, Kepulauan Riau trails the best
performing provinces a fair bit, it is in the three areas that the gaps are the widest that the
provincial government must immediately address as stagnation may further widen the gap,
otherwise they may throw Kepulauan Riau’s economic competitiveness into disarray.

2.3 A Quantitative SWOT Table and Analysis

The four-quadrant Table 7, guides the SWOT analysis for Kepulauan Riau.

The top left quadrant (Strength) shows the province’s top 20% or strongest 18 indicators out
of a total of 91 indicators used for ranking purposes. The higher performing indicators are
presented at the top. The top right quadrant (Weakness) shows the bottom 20% or weakest 18
indicators out of the same 91 indicators used. The lower performing indicators are presented
at the bottom.3

The bottom left quadrant (Opportunity) shows a hybrid score which is derived from
aggregating the scores from two indicators: Openness to Trade and Services, and
Attractiveness to Foreign Investors, regardless of whether the province has high or low scores
for these indicators. A higher aggregate score means that the province has higher opportunity,
compared to other provinces. A score of zero means that the province’s score is equivalent to
the average score for all 33 provinces. The bottom right quadrant (Threat), on the other hand,
shows a hybrid score which is derived from aggregating the scores from four variables:
Corruption Perception Index, Prevalence of Corruption, Crime Rate, Labour Relations and
Incidence of Earthquakes with 5.0+ Richter Scale, regardless of whether the province has
high or low scores for these indicators. A higher aggregate score means that the province
faces higher threat, compared to other provinces.

PART 2 -- Page 24
For Kepulauan Riau as a province, of its top 20% strength, two on top involves growth for
population in general (#1), and urban (#2), in particular, as well as overall Urban Population
(#5). Reflecting urbanisation as well as a strong position in human resources is strength in
health (hospital, health centres, medical workers) and education (capacity, enrolment and
human development index, HDI). The province is equally sophisticated as urban strength in
terms of information communication technology (ICT) connectivity (internet, phone).

ACI 33 Indonesia
Table 7. SWOT Provinces Competitiveness
Analysis of Kepulauan Index Riau
2010
SWOT Analysis of Kepulauan Riau

Strength Weakness
Rank 20% Strongest Indicators Score Environment Rank 20%Weakest Indicators Score Environment
1 Populaton Growth 4.3390 QLID 74 Labour Force -0.5464 FBMC
2 Urban Population Growth 3.4003 QLID 75 GRDP Growth -0.5727 MS
3 Openness To Trade 3.1415 MS 76 Ease of Dealing With Banks -0.6239 FBMC
4 Secondary Industry (%) 2.5359 MS 77 Adult Illiteracy Rate -0.6307 QLID
5 Urban Population 2.2267 QLID 78 Government Inclusiveness and Accountability -0.6352 GIS
6 Consumer Price Index 1.9621 MS 79 Primary Sector Employment -0.7031 FBMC
7 Populaton Per Number of Hospitals &Public Health Centers 1.8825 QLID 80 Government Effectiveness -0.7168 GIS
8 Gini Ratio 1.8771 QLID 81 Perception of Quality of Life -0.7189 QLID
9 Households With Handphone 1.8675 QLID 82 Length of (Paved) Roads (Total) -0.7754 QLID
10 Mean Years of Schooling 1.5890 QLID 83 Crime Rate -0.7810 GIS
11 Population Per Number of Medical Workers 1.4600 QLID 84 Vibrancy of Competition and Collaboration -0.7900 GIS
12 Internet Subscribers in Office 1.3892 QLID 85 Tertiary Industry (%) -0.8351 MS
13 Households With Laptop Computer 1.1818 QLID 86 Labour Relations -0.9223 FBMC
14 Internet Subscribers in House 1.1631 QLID 87 Prevalence of Corruption -1.0516 GIS
15 Human Development Index 1.0968 QLID 88 Regulatory Quality -1.1527 GIS
16 Households With Phone 1.0585 QLID 89 Primary Industry (%) -1.3515 MS
17 School Enrollment Rate (Senior) 1.0256 QLID 90 Firms' Strategy -1.3565 FBMC
18 GRDP Per Capita 1.0011 MS 91 Firms' Performance -1.6994 FBMC
* Openness to Trade & Services * Corruption Perception Index
Opportunity * Attractiveness to FDI Threat * Prevalence of Corruption
* Crime Rate
* Labour Relations
* Earthquakes with 5.0+ RS
100% 100%

1.48
75% 75% -0.46

50% 50%

25% 25%

0% 0%
-0.75 0.25 1.25 2.25 -0.81 -0.56 -0.31 -0.06 0.19 0.44

- 0 + - 0 +

In terms of top 20% weakness for Kepulauan Riau as a province, Firms’ Performance (#91),
and Firms Strategy (#92) are worrisome. Aiding and abetting such private concerns are
corruption (#87), Vibrancy of Competition and Collaboration (#84), Crime Rate (#83),
Dealing with Banks (#76) and Labour Force (#74). Overall GRDP growth (#75) caps
macroeconomic concern. The role of government is implicitly weak, explicitly and
specifically in effectiveness (#80) and inclusiveness inclusiveness and accountability (#78).

PART 2 -- Page 25
With private sector and government both weak, no two hands are clapping in unison despite
elaborate official policy and exquisite planning it means Kepulauan Riau goes nowhere
without implementing plans as wish-lists. Improving Regulatory Quality (#88) and attending
to other areas of weakness as Quality of Life all comes together as joining the dots in socio-
economic development. Kepulauan Riau does not need a crisis before any wake-up call, as
ACI has quite clearly forewarned, it is up to Kepulauan Riau to be forearmed.

Kepulauan Riau as a province has its opportunity (1.48 in value of ranking vis-a-vis 33
provinces) very near to the 100%-band as commendable. So maintaining that is as crucial. Its
threat (0.37 in value) remains is above the 75%-band, indicating again, no room for
complacency, but to manoeuvre it down.

PART 2 -- Page 26
SECTION 3: POLICY THEMES AND DEVELOPMENT STRATEGIES

3.1 Official policy3

The Master Plan for Acceleration and Expansion of Indonesia’s Economic Development,
2011–2025 (MP3EI) places Kepulauan Riau within the Sumatra Economic Corridor. It
identifies the cities of Batam and Tanjung Pinang, respectively, as the major port for free
trade zone and free port for the western Indonesia region. Tanjung Pinang, as the capital of
Kepulauan Riau, is also identified as having potentials for closer connectivity with Pontianak
in Kalimantan as well as with Jambi in Sumatra.

The eastern coast of Sumatra, along the Malacca Strait, is also identified as a potential
location to develop shipbuilding industries. Kepulauan Riau, with Karimun already ahead in
this industry, will be the spearhead for other potential locations such as Belawan and Kuala
Tanjung in Sumatera Utara, and Dumai in Riau province. No major infrastructure projects,
however, are directly planned for Kepulauan Riau.

Looking next at the local plans, Kepulauan Riau has established a mission to develop the
province as a prosperous, ethical, and environmentally friendly homeland for Malay culture.
Its mission specifically includes: (1) develop Malay culture as umbrella for other cultures, (2)
develop the fisheries potential in small islands, (3) develop fisheries based tourism based on
local culture, (4) develop local economic potential with priority on small economic actors, (5)
increase investment in quality infrastructure, (6) empower the people with quality education
and health services, (7) develop discipline, ethics, and supremacy of law, (8) develop a way
of life that is democratic, just and gender-balanced, (9) environmentally friendly development.
Karimun also envisions itself as a regency underpinned by religion as the basis of socio-

3
To be clear, in statecraft or an organisation, policy refers to a definite course of action adopted, in an effort to
promote the best practice particular to desired results as in labor-intensive or capital-intensive industrialization
policy or tax policy to attract foreign investment as well. Policy is aligned with strategy as a plan or method of
approach developed as in an effort to successfully achieve an overall goal or objective as in industrialization
strategy is to restructure and diversify industries. Strategy based on policy, both long-term, systemic with many
components comes with tactics as short-term involving the detail, the procedure, and the order of how to achieve
the desired results. All are part of planning; policy as vision, strategy as methodology and tactics as procedures,
all to be effectively and efficiently implemented to accomplish any target as prescribed by a policy.

PART 2 -- Page 27
political stability for economic activities. The four azzam (commitment) of the regency
government are improvement in faith and religious practices, economic development based
on society, human resources improvement, as well as art and culture development.

The provincial vision and mission statements seem to place high priority on ethnic identities
and local way of life. It is an interesting take, considering that major parts of the province is
being developed as a SEZ. This raises some questions of whether, and to what extent there is
synchrony between the expectations of the central government with those of the local
government. All of this creates uncertainty in policy-making and stalls execution along the
way.

In relation to the SEZ, there are quite number of actors and institutions involved in Batam
policy-making. These include Batam municipality government, Batam Indonesia Free Zone
Authority (BIFZA, otherwise known as Badan Pengusahaan Batam or BP Batam —
previously Otorita Batam), Regional Council (Dewan Kawasan), the provincial government,
as well as the central government. The presence of various overlapping institutions and
authorities reflect the multitude of interests in the region. It creates some confusion on how to
move forward, hence affecting execution.

Nonetheless, some priorities seem to have been established for BBK SEZ. The plan is for
Indonesia and Singapore governments to collectively focus on three sub-sectors: (1)
Enterprises server storage networking system (IT), (2) consumer electronics and engineering,
and (3) shipbuilding related to maintenance, repair and overhaul (MRO) activity support. As
for the main economic activities, the supply chain is determined by the export oriented
activities and products, such as electronics, oil and gas supporting industry, and shipyard
industry. Total work force in these sub-sectors is around 300,000.

The governments of Batam, Bintan and Karimun are individually focusing on some common
themes such as education and healthcare. For education, the Batam government has a higher
learning institution called Batam Polytechnic (established in 2000). The number of students is
around 1,000, with courses in accounting, IT (software development) and mechatronics.
Bintan and Karimun also have higher learning institutions in various fields related to their
industries. However, all three seem to agree that on-the-job training is as crucial as informal

PART 2 -- Page 28
education since technologies get obsolete quickly. They are now sending local students to on-
the-job training both in Java as well as to relevant centres in the region.

3.2 What-if Competitiveness Simulation Analysis (overall and 4 environments)

Relative ranking is not simply a beauty contest. If a province is ranked low and wishes to
improve its positioning by policies, it certainly can. By ACI’s simulation methodology
(policy-induced), in the next set of tables below, for before and after simulation, the
improvement in performance is seen the ranking of 33 provinces comprising:
1) Overall Competitiveness
2) Macroeconomic Stability
3) Government and Institutional Setting
4) Financial, Business and Manpower Conditions
5) Quality of Life and Infrastructure Development

The What-if Competitiveness Simulation is conducted to find out how much a province could
raise its competitiveness ranking if it focused to improve its bottom 20% or weakest 18
indicators.4 This exercise is based on three assumptions:
1) The simulation is conducted one province at a time.
2) A province raised the scores of its 18 weakest indicators to match the average score 5
for that indicator among the 33 provinces.
3) The scores for other provinces are assumed to remain constant, i.e. the others did not
improve on their top 20% or 18 weakest indicators.

The new scores based on improved indicators scores are then re-calculated to derive a new
score and new ranking for said province.

It is important to note that by the third assumption of What-if Competitiveness Simulation,


we cannot compare a province with other provinces in ranking vertically across. What-if
improvement is after simulation by the province, with the other provinces considered as static;

4
Top 20% strength and weakness at provincial level means 18 indicators out of a total of 91, whereas in the
national paper on Indonesia as with the rest of ASEAN states, with more data available, it is 28 out of a total of
128 indicators.
5
A very competitive province which already has higher than average scores, even for its top 20% or 18 weakest
indicators, will keep those original scores.
PART 2 -- Page 29
in other words, all What-if tables as collating all provinces cannot mean comparisons
vertically across.

Table 8: What-if Competitiveness Simulation Analysis


on Overall Competitiveness Ranking and Score
(Year 2010)

Rank Score Table 8 for Overall


Province Before After Before After Competitiveness, simulating
Aceh 16 10 -0.1444 0.1184
a situation where Kepulauan
Bali 9 6 0.1371 0.2792
Banten 7 6 0.2343 0.3931 Riau’s weakest 20%
Bengkulu 27 15 -0.2735 -0.1121 indicators are brought up to
DI Yogyakarta 6 5 0.2757 0.4263
average scores of all 33
DKI Jakarta 1 1 1.7576 1.9788
Gorontalo 15 13 -0.1130 0.0670 provinces, it improves in
Jambi 25 15 -0.2506 -0.0910 ranking from eighth to sixth.
Jawa Barat 4 3 0.5113 0.6594
Jawa Tengah 5 3 0.4282 0.5718
This may seem like a
Jawa Timur 2 2 0.6644 0.7661 marginal rise, but keeping the
Kalimantan Barat 22 15 -0.2273 -0.1027 momentum to upgrade is
Kalimantan Selatan 13 9 0.0146 0.1336
Kalimantan Tengah 26 15 -0.2681 -0.0784 crucial. Its positive score also
Kalimantan Timur 3 2 0.5523 0.6891 improves.
Kepulauan Bangka
Belitung 29 16 -0.3085 -0.1383
Kepulauan Riau 8 6 0.1708 0.3392 A small jump means that
Lampung 20 15 -0.1956 -0.0372 Kepulauan Riau is already
Maluku 31 15 -0.3438 -0.0748
Maluku Utara 32 30 -0.5107 -0.3179 starting from a good position.
Nusa Tenggara Barat 28 15 -0.2969 -0.1141 But improving in scores
Nusa Tenggara Timur 33 31 -0.6014 -0.3431
0.1708 to 0.3392 is necessary
Papua 24 12 -0.2378 0.0837
Papua Barat 30 15 -0.3179 -0.0666 as there is a lot of potential to
Riau 10 6 0.1152 0.3096 be realised.
Sulawesi Barat 21 14 -0.2062 -0.0191
Sulawesi Selatan 11 8 0.0993 0.2028
Sulawesi Tengah 23 15 -0.2311 -0.0765
Sulawesi Tenggara 18 14 -0.1655 -0.0059
Sulawesi Utara 14 10 -0.0259 0.1209
Sumatera Barat 17 14 -0.1559 0.0024
Sumatera Selatan 12 9 0.0816 0.1590
Sumatera Utara 19 10 -0.1683 0.1230

PART 2 -- Page 30
Table 9: What-if Competitiveness Simulation Analysis
on Macroeconomic Stability Competitiveness Ranking
and Score (Year 2010)

Rank Score In Table 9 for


Province Before After Before After Macroeconomic Sta bility,
Aceh 33 21 -0.5025 -0.2735
Bali 8 8 0.1384 0.2595
improvement of
Banten 7 6 0.2649 0.3522 Kepulauan Riau’s top 20%
Bengkulu 30 21 -0.4402 -0.2589 weakest indicators does
DI Yogyakarta 18 11 -0.2399 -0.0551
DKI Jakarta 1 1 3.2084 3.2960 not bring the province up
Gorontalo 27 24 -0.3925 -0.3266 in terms of rank.
Jambi 14 14 -0.1688 -0.1461
Jawa Barat 3 2 0.9083 0.9856
Jawa Tengah 6 6 0.2862 0.3658 It remains at fifth place
Jawa Timur 2 2 0.9111 0.9529 even after simulation.
Kalimantan Barat 24 18 -0.3531 -0.2310
However, as its scores
Kalimantan Selatan 12 11 -0.1147 -0.0173
Kalimantan Tengah 21 11 -0.2701 -0.0823 remain negative, -0.4536
Kalimantan Timur 4 4 0.6212 0.7227 and -0.1300 before and
Kepulauan Bangka
Belitung 13 11 -0.1313 -0.0981 after policy simulation,
Kepulauan Riau 5 5 0.3875 0.4990 the 10-place jump needs
Lampung 17 17 -0.1864 -0.1864
to be solidified.
Maluku 23 18 -0.3003 -0.2120
Maluku Utara 26 26 -0.3765 -0.3765
Nusa Tenggara Barat 22 21 -0.3000 -0.2560
Nusa Tenggara Timur 29 26 -0.4298 -0.3772
Papua 11 10 -0.1051 0.0673
Papua Barat 19 11 -0.2511 -0.0664
Riau 9 8 0.1354 0.2157
Sulawesi Barat 28 18 -0.3981 -0.2386
Sulawesi Selatan 15 11 -0.1794 -0.0074
Sulawesi Tengah 32 21 -0.4770 -0.2774
Sulawesi Tenggara 31 18 -0.4602 -0.2114
Sulawesi Utara 20 12 -0.2518 -0.1157
Sumatera Barat 25 14 -0.3733 -0.1390
Sumatera Selatan 16 12 -0.1842 -0.1095
Sumatera Utara 10 10 0.0246 0.0246

PART 2 -- Page 31
Table 10: What-If Competitiveness Simulation (WCS)
Analysis on Government and Institutional Setting
Competitiveness Ranking and Score
(Year 2010)

Rank Score In Table 10 for Government


Province Before After Before After and Institutional Setting, a
Aceh 13 4 0.1396 0.6022
Bali 16 13 0.0061 0.1936 simulation where
Banten 5 4 0.5031 0.5573 Kepulauan Riau improves
Bengkulu 20 14 -0.1314 0.1154
on its 20% weakest
DI Yogyakarta 4 3 0.5193 0.6111
DKI Jakarta 1 1 1.1541 1.3107 indicators will bring the
Gorontalo 8 4 0.4271 0.5637 province’s rank from 29th
Jambi 25 18 -0.3454 -0.0297
Jawa Barat 9 4 0.3625 0.5235 place to 19th place. This is
Jawa Tengah 3 2 0.6016 0.6750 a 10-step jump, and shows
Jawa Timur 2 2 0.6534 0.7220
the area where he province
Kalimantan Barat 18 14 -0.0738 0.0618
Kalimantan Selatan 11 10 0.2435 0.2691 should concentrate on
Kalimantan Tengah 24 19 -0.3433 -0.0935 improving.
Kalimantan Timur 17 14 -0.0068 0.1315
Kepulauan Bangka
Belitung 26 24 -0.3558 -0.2530 The original position of
Kepulauan Riau 29 19 -0.4536 -0.1300
Lampung 21 14 -0.2175 0.1030
29th is not appropriate for a
Maluku 33 18 -0.7544 -0.0742 province as advanced and
Maluku Utara 31 24 -0.6653 -0.2694
competitive as Kepulauan
Nusa Tenggara Barat 19 14 -0.1249 0.0749
Nusa Tenggara Timur 32 24 -0.6917 -0.3106 Riau. However, as its
Papua 22 10 -0.2407 0.2978 scores remain negative,
Papua Barat 28 18 -0.4414 -0.0568
−0.4536 and −0.1300
Riau 27 14 -0.4048 0.0550
Sulawesi Barat 12 6 0.2303 0.4419 before and after policy
Sulawesi Selatan 7 6 0.4371 0.4932 simulation, the 10-place
Sulawesi Tengah 14 13 0.0478 0.1854
Sulawesi Tenggara 15 10 0.0181 0.2561 jump needs to be solidified.
Sulawesi Utara 10 6 0.2574 0.4405
Sumatera Barat 23 16 -0.2452 0.0081
Sumatera Selatan 6 6 0.4398 0.4729
Sumatera Utara 30 11 -0.5447 0.2383

PART 2 -- Page 32
Table 11: What-If Competitiveness Simulation (WCS)
Analysis on Financial, Businesses and Manpower
Conditions Competitiveness Ranking and Score
(Year 2010)

Rank Score Table 11 for Financial,


Province Before After Before After Businesses and Manpower
Aceh 23 10 -0.2005 0.0169
Bali 13 8 -0.0778 0.1226 Conditions, with policy
Banten 22 9 -0.1838 0.0739 simulation Kepulauan Riau is
Bengkulu 26 23 -0.2906 -0.1885
able to rise to seventh position,
DI Yogyakarta 18 9 -0.1720 0.0487
DKI Jakarta 1 1 1.3993 1.7466 compared ninth position it
Gorontalo 20 9 -0.1797 0.0885 held previously.
Jambi 29 18 -0.3297 -0.1684
Jawa Barat 5 4 0.6432 0.7736
Jawa Tengah 4 3 0.7087 0.8609 It remains at a better place
Jawa Timur 3 3 0.8620 0.8875
among top-10 creme de le
Kalimantan Barat 14 12 -0.1052 -0.0621
Kalimantan Selatan 27 12 -0.2954 -0.0521 crème is important. It cannot
Kalimantan Tengah 25 14 -0.2868 -0.1096 let confidence and credibility
Kalimantan Timur 2 2 0.9566 1.1305
Kepulauan Bangka slip, both ranking and scores
Belitung 32 16 -0.5167 -0.1322 matter. This leap in ranking
Kepulauan Riau 9 7 0.0540 0.2400
Lampung 10 10 -0.0323 -0.0137
may seem minor, but it
Maluku 11 9 -0.0495 0.0889 improves score from 0.0540 to
Maluku Utara 31 31 -0.4830 -0.4047
0.2400, or by about 186 basis
Nusa Tenggara
Barat 28 24 -0.3086 -0.2513 points. Competition does get
Nusa Tenggara
Timur 33 25 -0.5380 -0.2810 harder and tougher at the top.
Papua 7 7 0.1643 0.3280 This improvement is certainly
Papua Barat 17 10 -0.1465 -0.0172
significant to help the province
Riau 6 5 0.5555 0.6690
Sulawesi Barat 19 19 -0.1739 -0.1739 become more competitive as
Sulawesi Selatan 12 9 -0.0645 0.1045 an international investment
Sulawesi Tengah 24 18 -0.2495 -0.1554
Sulawesi Tenggara 16 15 -0.1267 -0.1096 destination.
Sulawesi Utara 30 20 -0.3552 -0.1784
Sumatera Barat 15 14 -0.1208 -0.0952
Sumatera Selatan 8 8 0.1235 0.1346
Sumatera Utara 21 10 -0.1806 0.0126

PART 2 -- Page 33
Table 12: What-If Competitiveness Simulation (WCS)
Analysis on Quality of Life and Infrastructure
Development Competitiveness Ranking and Score
(Year 2010)

Rank Score Table 12 for Quality of Life


Province Before After Before After and Infrastructure
Aceh 16 12 -0.0142 0.1280
Development, Kepulauan
Bali 5 5 0.4818 0.5799
Banten 6 5 0.3528 0.5893 Riau is already competitive
Bengkulu 22 19 -0.2318 -0.1165 for Indonesia’s standards, and
DI Yogyakarta 2 2 0.9952 1.1006
it remains at third place even
DKI Jakarta 1 1 1.2684 1.5618
Gorontalo 25 17 -0.3070 -0.0577 after simulation. When a
Jambi 19 17 -0.1584 -0.0196 province is already doing
Jawa Barat 12 6 0.1311 0.3550
Jawa Tengah 13 6 0.1161 0.3854
well, improvement in rank
Jawa Timur 8 5 0.2310 0.5020 gets tougher, but
Kalimantan Barat 27 20 -0.3769 -0.1794 improvement in score is
Kalimantan Selatan 9 7 0.2249 0.3348
Kalimantan Tengah 20 17 -0.1723 -0.0468 always possible, no matter
Kalimantan Timur 4 3 0.6381 0.7542 how marginal.
Kepulauan Bangka
21 18 -0.2303 -0.0698
Belitung
Kepulauan Riau 3 3 0.6953 0.7284 If Kepulauan Riau, or BBK
Lampung 26 17 -0.3463 -0.0518 SEZ specifically, is targeting
Maluku 24 19 -0.2710 -0.1021
Maluku Utara 31 21 -0.5181 -0.2209 itself to become a “prominent
Nusa Tenggara Barat 29 16 -0.4543 -0.0240 investment destination in
Nusa Tenggara Timur 32 28 -0.7460 -0.4036
Asia Pacific”, as it stated in
Papua 33 25 -0.7695 -0.3118
Papua Barat 28 19 -0.4327 -0.1259 its official document, then it
Riau 11 7 0.1749 0.2753 should not be satisfied with a
Sulawesi Barat 30 18 -0.4830 -0.1058
relatively good position
Sulawesi Selatan 10 7 0.2038 0.3181
Sulawesi Tengah 23 18 -0.2455 -0.0587 compared to other Indonesian
Sulawesi Tenggara 18 15 -0.0932 0.0414 provinces. It should, instead,
Sulawesi Utara 7 7 0.2462 0.3192
aim to be better and improve
Sumatera Barat 14 10 0.1156 0.2211
Sumatera Selatan 17 15 -0.0526 0.1066 to aim for international
Sumatera Utara 15 11 0.0276 0.1914 standards.

PART 2 -- Page 34
3.3 Development strategies

An analysis of Kepulauan Riau’s competitiveness ranking from four different environments


as per ACI methodology shows that the province is quite competitive in terms of Quality of
Life and Infrastructure Development (third position), Macroeconomic Stability (fifth
position), and doing better than average in terms of Financial, Business and Manpower
Condition (ninth position). It is doing poorly, however, in terms of Government and
Institutional Setting (29th position). This brings forth clear recommendations in terms of
development strategies to plug the wish-list of official policy and reality check in execution.

Kepulauan Riau clearly needs to improve on its Government and Institutional Setting. An
analysis of SWOT Table 7 shows that the province’s weaknesses are dominated by low
scores of indicators from this particular environment. The indicator which generates the most
concern is Regulatory Quality.

This is largely attributable to the overlapping regulatory institutions that govern BBK SEZ,
most particularly Batam, as regulated by a number of central and local government
institutions. They include BIFZA, Regional Council, provincial government, municipal
government, as well as central government ministries. This creates confusion, and delays,
slow-moving action to decide what to do in Batam.

Another issue with Regulatory Quality is the orientation of local regulations, which seem to
focus on developing local cultural and religious identities. This, in itself, is not an issue until
such locally-oriented regulations form a backlash by those who think that development has
hampered local values.

Hosting a SEZ, of course, is an indication of willingness to be engaged more openly with the
international society and foreign investors. Were there any local tensions in terms of how
BBK should go about in establishing the SEZ? This issue needs further investigation or
mixed signals to FDI result.

Regulations related to land acquisition and protection of land-use rights are also important
aspects of regulatory quality that keeps out FDI. This problem is not unique to Kepulauan
Riau, but applies nationally. The reason is a weak law that does not stipulate clearly how land
PART 2 -- Page 35
could be acquired for investment purposes in balance with protection of local livelihood.
Lack of clarity in terms of whether and how land could be acquired has given investors
uncertainty in their business plans.

Other issues related to Government and Institutional Setting is high crime rate and the
perception that there is high prevalence of corruption. Related to this environment, but
actually placed under Financial, Business and Manpower Conditions, is the perception that
the province is also hampered by unfavourable Labour Relations.

Together, these indicators contribute to the formation of the aggregate indicator “Threat”.
The province, together with the central government and related authorities, therefore needs to
work on curbing crime and corruption, as well as ensuring an environment of labour relations
that is favourable for both workers and firms.

The local and provincial governments still need to work hard to win the hearts of the people
as well as business owners. There is currently low perception in terms of Government
Effectiveness, Government Inclusiveness, and Government Accountability. A survey of the
business establishments in the province shows that business owners think the government is
not very effective or accountable. They also think that they are not consulted enough in the
province’s decision-making. These are issues of governance. Kepulauan Riau could improve
much on its competitiveness by adhering to the principles of good governance.

The government is already on the right track in its commitment to trade openness as well as
improving education and healthcare services to the people. In manufacturing activities,
human resources are indeed one of an area’s main assets. Aside from the need for adequate
infrastructure, industrial activities are based on the premise of skilled and healthy workers at
competitive wages. Competitive does not necessarily mean the cheapest. Kepulauan Riau has
to offer labour that gives value in comparison.

If the province does not offer any skills, then it has no choice, but to be realistic and offer
cheap labour. However, if it can offer skilled labour, it does not have to resort to being cheap.
This way, the province develops more a sophisticated form of competitiveness, not just one
based on cost. This will ultimately bring more benefits to businesses, workers and
governments alike.
PART 2 -- Page 36
Finally, none of the above could be achieved without adequate infrastructure. Roads, rail,
seaports, and airports are vital elements that enable timely and inexpensive movement of raw,
semi-processed, and final goods. This condition is experienced throughout Indonesia but
should not happen especially in a SEZ with long history as that in Kepulauan Riau.

Infrastructure of Kepulauan Riau is already struggling to meet current demand, much less to
meet the demands of the future, when the BBK SEZ is running in full steam. Local,
provincial, and central government coordination is needed to quickly plan and establish the
infrastructure needed. Possible involvement of private sector may also be explored in the
form of public-private partnerships (PPPs).

PART 2 -- Page 37
SECTION 4: CONCLUDING REMARKS

Kepulauan Riau enjoys an open economy and a history of industrialisation and external trade,
strengthened by the position of BBK as SEZ. It also has much potential from being located at
the gate of the Malacca Strait, just a short distance away from Singapore.

Furthermore, it has natural resources in the form of natural gas in Natuna. All this should
place the province in a very competitive position compared to other provinces in Indonesia. It
is pertinent to note that cooperation with Singapore in Batam SEZ has instilled a holistic,
integrated and systemic approach to joining all the dots in any plan execution. It is not just
about efficiency, effectiveness or productivity, crucial as these criteria are. Thorough thinking,
back and forth, anticipating, and proactive for overall competitiveness be responsive are
hallmarks of success.

Indeed, the province is not doing badly. Ranked at eight position, it occupies a place among
the provinces with high competitiveness, but not for Government and Institutional Setting at
29th. This begs the question of whether Kepulauan Riau should be able to do better. The
answer is yes. Given the potential that it has, the province could have achieved better more,
and could easily have been among the top five competitive provinces.

Development of Kepulauan Riau is critical for several reasons. First, considering its
proximity to Singapore, improving the province’s performance should be an “easy win”.
There are already interested investors who are waiting across the Malacca Strait, as well as
from other parts of the world. If Kepulauan Riau can provide the right environment, attracting
more investment should not be a big hurdle.

Second, developing Kepulauan Riau into a stronger manufacturing hub can bring the benefits
of industrial restructuring in Indonesia. Currently, a significant part of Indonesia’s GDP is
generated by natural resources. This brings a dilemma. Exploitation of natural resources is
not only unsustainable, but also not quite labourintensive, especially in high-skilled job.
Indonesia needs to generate more jobs and engage in activities that will enable local
enterprises to develop their own industrial activities through knowledge and technology
transfers.

PART 2 -- Page 38
Kepulauan Riau is doing much better than the average Indonesian province in terms of
Openness to Trade, Productivity Performance, Infrastructure and Standard of Living. Its
Attractiveness to Foreign Investors is, interestingly, about the same level as the average for
Indonesian provinces.

Considering that Attractiveness to Foreign Investors is a function of the past three-year


average FDI flows into the province, we can interpret that between 2008 to 2010, Kepulauan
Riau has been attracting mediocre level of investment. Or at least, less than it has been in the
past. This is a matter of concern, especially given Kepulauan Riau’s huge endowment which
should make it much more attractive to FDI. Apparently since 2007, three years leading up to
2010, Kepulauan Riau is no longer such an attractive investment destination. Why is that so?

Several potential answers could be further explored. Looking at the environments which
Kepulauan Riau has not performed well, we can see that there is much room for improvement
in aspects related to Governance and Institutional Setting. Of particular concern is
Competition, Regulatory Standards and Rule of Law. This subenvironment scored lower
compared to other provinces. This could perhaps be explained by the confusion over Batam’s
authority, which is currently handled in an overlapping manner between various central and
local institutions. Land market is another issue that still expects solution from a coordination
of central and local governments. Without a rule of law that gives sufficient protection of
land use, investment is bound to be short and opportunistic.

Another low score in this environment go to Financial Deepening and Business Efficiency,
which indicate low level of efficiency in conducting manufacturing in the province and lack
of adequate supply chains. This question could be placed on the manufacturing firms
operating in BBK, which are mainly foreigners. Why do they operate with such low
efficiency? Is it a matter of issues related to the local business environment, or the spotlight
should be placed on the firms which are not very innovative and lean in their operations?

A possible insight could be generated from looking at another low-scoring indicator, which is
Labour Market Flexibility. Could low levels of efficiency be attributed to labour tensions that
plague Batam lately? Is the problem related to Indonesia’s labour laws, which some people
have indicated as too stringent, or is the problem related to more local tensions between
factories and workers? Is more research needed to identify the issues at stake in more detail,
PART 2 -- Page 39
or Kepulauan Riau has to start what is so clearly identified by ACI now, in motion? Paralysis
by analysis is a pity.

In conclusion and in terms of policy implications, Kepulauan Riau as a province is more


outstanding, literally and figuratively than most others. This is in terms of geographic spatial
location and proximity to Singapore with a competitive advantage in industries such as
shipyard and tourism. These need to be constantly cherished and continuously enhanced. As
the pioneer of ASEAN growth triangles, emblematic of PPPs, it is both a model with many
lessons and much experience for BBK in particular, and Indonesia in general.

Industrial clusters within and outside the province can be as Indonesian as regional and global.
Kepulauan Riau has appreciated economies of scale and scope as well as agglomeration
through its SEZ development in partnership with Singapore. It is a matter of appetite of
investors if Kepulauan Riau is fully cognisant and aware of what is missing in terms of
human resources. Equally emphasised as policy themes and development strategies is more
investors to be attracted vis-a-vis land, infrastructure and other issues resonating across
Indonesia for island groupings.

Kepulauan Riau must build a clear understanding and insight of its strategic location on one
hand, and SWOT-gap on the other hand. Both of these remain at the core of its policy theme.
For a full meeting of minds and policy at the local, provincial, and central governmental
levels, this is truly as Indonesian challenge as any. Effective and credible communication to
investors at home and abroad is not just public relations, they sell opportunity and create buy-
in.

PART 2 -- Page 40
PART IV: INDUSTRIAL UPGRADING MODELS AND ANALYSIS ON
REVITALIZING BBK SEZS WITH INDUSTRY-SPECIFIC FOCUS ON
ENTERPRISE SERVERS, STORAGE & NETWORKING SYSTEM
(ESSNS), CONSUMERS ELECTRONICS & ELECTRICAL
COMPONENTS (CEEC) AND SHIPBUILDING, SUPPORT
EQUIPMENT FOR OIL & GAS DRILLING (SOG) CLUSTERS.

There are four Industrial upgrading models regional economic expansion for developing
economies as follows:

1. Industrial Districts:
It is an industry strategy by way of a three-prong approach to systematically harness
market, government and social capital as core forces to provide catalytic effect to
ensure production organization. Through inter & intra dynamic coordination amongst
firms to march towards industrialization. Such industry district scale development
model required a highly discipline and efficient government which can effective plan
and execute.
2. Growth Poles:
Emphasize on a single industry or single group of companies, through government’s
investment in infrastructure in a single location to promote regional economic
development so as to stimulate or strengthen economic externalities and
competitiveness. Such regional industrial development model is relatively more risky
and usually is being led by a regional development agency with strong leadership and
ample resources.
3. Export Processing Zones
Resource-poor economies initially identify the build-up of basic infrastructure in a
designated approved export processing zone. Smoothing custom coordination and
security arrangements help to attract foreign direct investment so as to create
employment under the export-oriented strategy. However, with rising costs of
production and emergence of other low cost production centers thus resulted in loss of
attractiveness as an investment destination and trade volume.
4. Industrial Clustering
The strategy of building industrial cluster is to mobilize critical resources and harness
core competence so as to achieve global competitiveness and secure advantages
PART 2 -- Page 41
position. Through a knowledge-based economy, effort would be required to enhance
higher productivity and innovative capability. Clustering firms, through high-tech
research and development, would try to stimulate supply chain participation and
attract further economic activities (See chart A, B & C). Such an industrial clustering
regional development model is most suitable for an economy to further upgrade and
maintains its leading edge.

Chart A: Critical factors for Industrial repositioning and upgrading

Chart B: Supply chain system

PART 2 -- Page 42
Chart C: Value chain activities

Suggestions for Indonesia / BBK’s industrial clusters and industrial upgrading

We have reviewed and analyzed on Indonesia’s (and BBK’s) potential industrial


development and economic upgrading process. We thus concluded tentatively with the
following suggestions. The thrust of our analysis is to exploit on Indonesia’s current
comparative economic advantage, with proposals to enhance strengths and to overcome
existing weaknesses. We explored how Indonesia can and should take full advantage on the
current international economic development and potential reshuffling or shifts in foreign
direct investment and business opportunities so as to ensure sustained economic growth with
minimized threats and risks.

We therefore propose for Indonesia / BBK SEZs the following 11 Industrial Clusters
including:
A – Petroleum & Petrochemical Cluster (BBK?)
B – Heavy Engineering Cluster (BBK?)
C – Shipping & Logistic Cluster (BBK)
D – Electronics Cluster (BBK)

PART 2 -- Page 43
E – Aircraft, Automobiles & Precision Engineering Cluster (BBK?)
F – General Supporting Industries Cluster
G – General Export Processing Cluster
H – Information & Communication Technology Cluster (BBK)
I – Agriculture Processing Cluster
J – Tourism Cluster
K – Construction Cluster

Chart A to Chart K list in detailed the respective industrial cluster’s drivers, core and
secondary activities and core capabilities and skills required.

Proposed Petroleum & Petrochemical Cluster Analysis A:

PART 2 -- Page 44
Proposed Heavy Engineering Industrial Cluster Analysis B :

Proposed Shipping & Logistic Cluster Analysis C:

PART 2 -- Page 45
Proposed Electronics Cluster Analysis D:

Proposed Aircraft, Automobiles & Precision Engineering Cluster Analysis E:

PART 2 -- Page 46
Proposed General Supporting Industries Cluster Analysis F:

Proposed General Export Processing Cluster Analysis G:

PART 2 -- Page 47
Proposed Information & Communication Technology Cluster Analysis H:

Proposed Agricultural Processing Cluster Analysis I:

PART 2 -- Page 48
Proposed Tourism Cluster Analysis J:

Proposed Construction Cluster Analysis K:

PART 2 -- Page 49
PART V: FIVE CORE SUGGESTIONS FOR INDUSTRIAL UPGRADING AND
REVITALIZING ECONOMIC DEVELOPMENT FOR BBK SEZs,
PERTINENT ISSUES TO BE ADDRESSED AND PROPOSED
URGENT REFORMS REQUIRED.

In order to achieve BBK’s medium term economic growth objectives with forward-looking
pro-business strategies, industrial repositioning with effort to regain her relative
competitiveness vis-à-vis other Asian economies. We thus address policies issues, based on
our interviews with major players and potential investors, pertaining to a few targeted
industrial clusters with following core suggestions for urgent reforms

(i) Labor market conditions and reform measures


a) Labor supply, labor demand and labor market inflexibility
b) Highly politicized union militancy versus wage maximization and employment
maximization models
c) Ineffective minimum wage policy and cost of labor for SMEs
d) Manpower gap in skills, training and productivity which can undertake jointly
with Singapore and Indonesia Investment Coordinating Board (BKPM) and
Economic Development Board (EDB) of Singapore

(ii) Incentives and benefits for potential Investors


a) Land lease, rental charges and land prices
b) Clustering of downstream supplier activities
c) Tax incentives, tax holidays and other business-related benefits

(iii) One-stop Investment promotion and marketing agency for potential and existing
investors
a) Joint-marketing effort abroad by BBK Investment Authorities together with
EDB of Singapore and BKPM of Indonesia.
b) Highlighting relative competitiveness of Riau Islands vis-à-vis 33 provinces of
Indonesia and in the context of Asian regional economies including 34 Greater
China economies, 35 states of India and ASEAN-9.
(iv) Better management of production processes and establish a complete value-chain
amongst multinational corporation (MNCs) and small & medium enterprises
PART 2 -- Page 50
a) Set up a Business Facilitation Agency (BFA) set up and funded by the
business community and endorsed by the local and central government. BFA
would help to resolve and overcome day-to-day production problems faced by
companies.
b) To hold regular meetings or seminars to brief on policy / new regulations to
existing and/or potential companies.
c) Identify relevant suppliers to support targeted manufacturing sub-sectors

(v) Enhance further closer coordination between local and central government
a) Reduce layers of decision making process such as issuance of production
permits which may lie with different level of governing authorities within the
province and which would also involve negotiation with the central
government.
b) Streamline inefficient bureaucracy where decision making can be further
decentralized and improve ease of doing business.

Pertinent issues on environmental friendliness and sustainability to be addressed when


re-vitalizing and upgrading development for BBK SEZs

It is possible to have balanced and sustained economic growth in harmony with environment.
Experience of Singapore with well-considered economic principles, effective policy
formulation, legal legislation and implementation further support such view.

(i) When considering initiating projects or making choices, do look at the longer-term
cost sustainability the next best choice and the optimal timing

(ii) When setting appropriate pricing in order to achieve high efficiency and low cost
benefits, do consider the full cost recovery of environmental protection, reflect on
pricing of other policy formulations such as water conservancy charges and price
differential for management of industrial waste.

(iii) Through market competition to achieve an effective redistribution of risks, broaden


the range and cost of waste recycle, innovative approach in waste disposal and
diffusion of environmental technology.
PART 2 -- Page 51
(iv) Through subsidies, price mechanism and legislation measures to overcome market
imperfection

(v) Closer coordination and interaction between local community, stake holders and
vested groups

(vi) Better connected with global communities in terms of research, training in technology,
enhance regional and bilateral cooperation, sharing of experiences and be a citizen of
the global village under Montreal Protocol, Basel Convention, and Kyoto Protocol.

Suggested executive training programs to be undertaken English/Bahasa Indonesia to


supplement re-vitalizing and upgrading of development for BBK SEZs

Module A: Latest global economic profile updating for senior government officials and
senior management staff from the private sector corporations):
Analyze relative competitiveness of global economies and shifts in global
engines of growth to ASEAN especially in the context of emerging China and
India.

Module B: Master planning and development blueprint for BBK for senior government
officials and senior management staff from the private sector corporations):
To undertake longer-term integrated master planning and development
strategies for BBK which must take into account of population, manpower
requirement and public services provision.

Module C: On policy formulations for a friendly and sustainable environment for BBK
government officials and administrative staff from private sector corporations):
Formulating and implementing policies for an integrated green and sustainable
environment in conjunction with affordable housing, transportation
infrastructure industrial waste and clean water treatment for BBK.

PART 2 -- Page 52
APPENDIX

COMPARATIVE EVALUATION ON RELATIVE COMPETITIVENESS OF


REGIONAL SPECIAL ECONOMIC / INDUSTRIAL ZONES: A SWOT ANALYSIS
AND ROLE OF THE GOVERNMENT

PART 2 -- Page 53

You might also like