Indonesia Considers an SEZ on Natuna: Investment Prospects, Challenges

Posted by Written by Alexander Chipman Koty Reading Time: 4 minutes

The Indonesian government is mulling the prospect of turning the Natuna Regency into a special economic zone.

The natural features and resources of the Natuna Regency give it considerable potential for tourism and energy development, as well as fishing. The regency has one of the world’s largest sources of untapped gas.

The Indonesian government may turn the Natuna Regency into a special economic zone (SEZ) in a bid to attract investment and strengthen regional security. The decision to turn the Natuna Regency into an SEZ is not yet final, but if passed the designation will introduce an array of incentives to bolster the region’s tourism, fishing, energy, and security sectors.

Indonesia currently has 12 SEZs in operation and seven more under construction, for a total of 19. SEZs provide attractive conditions to investors by offering incentives, tax breaks, high-quality infrastructure, and industry clustering.

While the transformation of the Natuna Regency into an SEZ would introduce similar incentives, businesses considering operating in the region must grapple with heightened political risks stemming from its involvement in territorial disputes.

The appeal of Natuna Regency for investors

The Natuna Regency, also known as the Natuna Islands, is a collection of about 154 islands in Indonesia’s Riau Islands province, 27 of which are inhabited. The islands fall between the Malaysian Peninsula to the west and Borneo to the east.

The population of the Natuna Regency is fairly small, with just over 80,000 residents, according to the 2020 census. Over 99 percent of the Natuna Regency’s territory consists of the sea.

The natural features and resources of the Natuna Regency give it considerable potential for tourism and energy development, as well as fishing. The Natuna Regency has at least 46 trillion cubic feet of proven natural gas reserves, making it one of the world’s largest sources of untapped gas.

Much of the natural gas currently sourced from the Natuna Regency is exported to neighboring Singapore and Malaysia. One of Singapore’s two agreements with Indonesia for pipeline gas comes from offshore fields off Natuna.

Fishing and tourism are other key industries in the Natuna Regency. However, both these industries suffer from infrastructure gaps. For instance, the fishing industry lacks processing facilities to add value to local fishing, while the tourism industry suffers from poor connectivity and transportation.

Political risks of investing in the area

The Natuna Islands are at the forefront of territorial disputes between Indonesia and China – a factor that greatly increases the political risks of investing in the region. Indonesia claims the Natuna Islands as falling within its 200 nautical miles exclusive economic zone (EEZ), while China claims the islands under its “nine-dash line” historic rights claim.

In 2021, the Chinese government told Indonesia in a letter to stop drilling for oil and gas in the Natuna Islands because it falls within its claimed “nine-dash line”. The Indonesian government refused to comply, leading to a situation where military ships from both countries patrolled oil and gas fields in a tense environment.

Territorial disputes surrounding the Natuna Islands do not just occur in political statements. Chinese, Thai, and Vietnamese vessels have been known to fish in the area, in addition to Indonesian ones, which risks provoking a conflict. In 2016, Indonesian law enforcement seized a Chinese vessel accused of fishing illegally in Indonesian territory, but the Indonesian authorities were unable to return the vessel to the Natuna Islands because of interference from the Chinese coast guard.

How to read the government’s plans to develop Natuna Regency

The possibility of an SEZ is not the only initiative to further develop the Natuna Regency. Earlier plans launched by the Indonesian government have shown the increased importance it is placing in the Natuna Regency, setting the stage for its possible SEZ designation.

In March 2022, President Joko Widodo (Jokowi) issued Presidential Regulation No. 41/2022 on Plan of North Natuna and Natuna Sea Zoning. The decree sets out six different designations for zones in the Natuna Islands, each with a focus on a particular area, such as tourism, fishing, oil, and gas, or security. For instance, the decree establishes fishing zones on the north side of the Natuna Regency and bordering the 200-mile EEZ.

The decree also pledged to build a new military base in the Natuna Regency. The government will be allowed to carry out military and coast guard drills in designated security zones.

Both the possible SEZ and the presidential decree combined indicate plans for an increased military presence in the area alongside economic development. A larger military presence may give investors greater confidence in securing their assets, but at the same time risks provoking tensions between Indonesia and its neighbors.

Earlier, in 2018, the Indonesian government added Natuna to its list of national geoparks, offering the region and its landscapes protected status for its geologic features. In addition to increased protection, the designation raises the profile of the Natuna Regency as an international tourist destination.

Key considerations for foreign stakeholders

The transformation of the Natuna Regency into an SEZ, if passed, stands to create opportunities for foreign investors in the tourism, fishing, energy, and security sectors.

Any investment in the Natuna Regency, however, must factor political risks into the equation.

For example, in the tourism sector, a diplomatic standoff between the Indonesian and Chinese governments could lead to boycotts from Chinese tourists or bans on their ability to book tours in the area. In 2017, the Chinese government banned travel agencies from offering group tours in South Korea amid a dispute between the two countries. Further, disputes between fishing vessels active in the area surrounding the Natuna Islands and the significant Indonesian military presence in the area could harm its reputation as a tourist destination.

The risks are not just limited to tourism.

Competing claims over rights to oil and gas drilling are a central component of the territorial disputes between the Indonesian and Chinese governments. A new crisis and the potential worsening of a dispute could directly involve an energy project in the region, putting investments in the sector at significant risk.

While investment in the Natuna Islands carries risks, the region’s importance to the Indonesian government also offers opportunities.

From building a new military base to potentially setting up an SEZ, the Indonesian government is investing heavily in the Natuna Islands and is seemingly committed to its success.

For businesses already interested in investing in the Natuna Islands but put off by infrastructural deficits and logistics costs, the possibility of an SEZ is welcome news. This may especially be the case in the tourism industry, which would greatly benefit from increased domestic and international connectivity, as well as improved transportation within the Natuna Regency itself.

The Indonesian government’s plans for a Natuna Islands SEZ will likely become clearer in the coming months. If announced, additional news on the SEZ’s incentives, features, and timelines stand to follow.

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