Indonesia is set to open two new special economic zones (SEZs) in the island city of Batam after President Joko Widodo recently approved the decision.
The new zones aim to develop a number of industries in Batam, with an emphasis on the digital economy, data centers, logistics, tourism, and aviation.
Batam has been a free trade zone since 2009, along with the neighboring Bintan and Karimun islands, and its first SEZs were set up in 2017. Together, the three islands are known as the BBK free trade zone.
In addition to the new SEZs, Batam has several other projects in the pipeline, including upgrades to the Batu Ampar Port and the development of the healthcare sector.
What are the advantages of a special economic zone in Indonesia?
SEZs in Indonesia benefit from several advantages, such as business tax and income tax cuts as well as special investment incentives. They also tend to have a higher-quality infrastructure and benefit from industry clustering.
Where are the new Indonesian special economic zones located?
Nongsa Digital Park currently focuses on digital technology and tourism and Batam Aero Technic specializes in the maintenance, repair, and overhaul of passenger aircraft; both will be upgraded to SEZ status.
The plans for the SEZs were submitted last year but required approval from Widodo, better known as Jokowi, before being finalized. Indonesia’s Coordinating Minister for Economic Affairs, Airlangga Hartarto, announced the new SEZs following a visit to Batam on June 12, 2021.
The Indonesian government hopes that the SEZs will help lead Indonesia’s economic recovery from the COVID-19 pandemic, which has battered the country.
Nongsa Digital Park: a hub for electronics and data centers
Nongsa Digital Park, located in the northeast of Batam, will see its status upgraded from a technological park to an SEZ. With the upgrade, the park will focus on research and development, education, and creative industries, along with its existing focus on technology and tourism.
The park originally opened in 2018 after bilateral discussions between Indonesia and Singapore to develop a “digital bridge” between the two countries. Travelers can reach Batam from Singapore with a one-hour ferry ride.
Currently, the park’s 155.43 hectares of land is home to over 100 technology companies, mostly from Singapore, employing 1,200 workers.
As an SEZ, the park aims to attract more international investors, beyond the largely Singapore-based contingent currently active in the area. Its goal is to receive 16 trillion rupiah (US$1.1 billion) in investments and to create 16,500 new jobs.
To reach this target, the park hopes to become a hub for data centers, an industry the market research firm Technavio projects will grow by US$10.57 billion between 2019 and 2023 in Southeast Asia.
Marco Bardelli, the park’s senior executive director, said that an initial 25 hectares of the park will be dedicated to data centers, along with planned expansion in the future. Currently, all of Indonesia’s data centers are located in Jakarta, the country’s capital and largest city.
In a statement, Hartarto said, “the government continues to encourage investment realization, especially for data centers, as an effort to improve and develop the digital economy.”
Batam Aero Technic: A node in Indonesia’s booming aviation industry
Batam Aero Technic is currently a 30-hectare facility owned by Lion Air Group, the holding company that owns Indonesia’s largest private airline.
With the upgraded SEZ status, Batam Aero Technic plans to expand from maintenance, repair, and overhaul of passenger aircraft to logistics and distribution, production and processing, and technology development.
The closest airport to Batam Aero Technic is Hang Nadim Airport, which is the region’s only international airport. In March, Korea’s Incheon International Airport Corp. won a project worth KRW 600 billion (US$519 million) to develop and operate the airport for 25 years, including opening a second passenger terminal by 2024.
Lion Air spokesperson Danang Mandala Prihantoro was quoted in an interview saying, “Our main hope is to develop an integrated aircraft maintenance (facility) so as to reduce the number of services currently being done abroad.”
Batam Aero Technic aims to receive 7.2 trillion rupiah (US$500 million) in investments and to create close to 10,000 new jobs with the upgrade to SEZ status.
Prior to COVID-19, Indonesia was the second-fastest-growing aviation market in the world, after China, according to the statistics firm Statista. Statista projected Indonesia to become the sixth-largest market for air travel in the world by 2034 due to tourism, trade, and the country’s island-based geography.
The COVID-19 pandemic has severely impacted Indonesia’s aviation industry. According to the aviation data provider Cirium, Indonesia’s annual seat capacity crashed from close to 163 million in 2019 to 130 million in 2020, representing a 20 percent decline.
Despite the disruption, a white paper by Padjadjaran University commissioned by the Indonesia National Air Carriers Association projects Indonesia’s flight volumes to return to pre-pandemic levels in 2024 and to make a full recovery by 2026.
Why Batam is likely to attract more Singapore-based investors
Batam’s new SEZs, combined with its proximity to Singapore and location on the busy Malacca Strait shipping route, give the island strong potential to grow and attract more international investors, especially those based in Singapore.
Singaporean-based companies can also benefit from the Singapore-Indonesia expropriation protection and upgraded double taxation avoidance agreements that entered into force in 2021, and access Indonesia’s huge 270 million strong domestic market.