JOINT EXPERT STUDY ON COMPETITIVENESS OF BATAM-BINTAN-KARIMUN Kajian Joint... · 2021. 1. 24. · KARIMUN (BBK) Introduction Batam has been a bounded zone to facilitate manufacturing

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

PART 1 -- Page 1

COMPETITIVENESS OF FREE TRADE ZONE BATAM, BINTAN, KARIMUN (BBK)

Introduction

Batam has been a bounded zone to facilitate manufacturing export

since 1986. Since then there have been several changes to develop

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.

The strategic location of BBK, in busy Strait Malacca and proximity to

Singapore gives BBK an advantage to attract FDI (Foreign Direct

Investment). Batam has been able to attract FDI in electrical and

electronics, shipyard, and supporting oil and gas industry. Meanwhile,

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 BBK development is institutional problems

related to the work of authority and its working relationship with local

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.

Batam, Bintan and

Karimun were

granted as Free

Trade Zone in 2007

Batam has been able

to attract FDI in

electrical and

electronics, shipyard,

and supporting oil

and gas industry

The main obstacle of

BBK development is

institutional

problems

PART 1 -- Page 2

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.

FTZ BBK formally launched in 2009 with three separate FTZs, namely

Batam that relatively more developed, and three other FTZs, namely

Bintan, Tanjung Pinang (also in Bintan) and Karimun. The government

regulations in 2007 stated the boundaries of these FTZs. Neverthless,

Batam FTZ has been extended recently to include Janda Berhias island.

Figure 1: The map of FTZs BBK.

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

independent. The authority is supervised by Board of FTZ (Dewan

Kawasan/DK) chaired by Governor with vice chairman is related

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 Batam is quite developed, except that Batam port is

not keep up with the growing of the economy. Infrastructure in Bintan

The government

regulations in 2007

stated the

boundaries of FTZs

Batam Bintan

Karimun

The authority is

supervised by Board

of FTZ (Dewan

Kawasan/DK) chaired

by Governor

Infrastructure in

Batam is quite

developed, except

that Batam port is

not keep up with

the growing of the

economy

PART 1 -- Page 3

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.

Batam has been able to attract FDI especially in electrical and

electronics, oil and gas supporting, and shipyard industries. However,

the growth of investment has not been high enough and lag behind

compare to its competitors, such as Penang, and Waigaoqiao in

The growth of

investment has not

been high enough

and lag behind

compare to its

competitors

PART 1 -- Page 4

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 Karimun FTZs is still in early stage. In Bintan

practically investment that existed is the left from Lobam bonded zone.

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 development of BBK is related with institutions.

Despite the law, government regulation, and minister decision are in

FDI in Bintan and

Karimun FTZs is still

in early stage

The main issue for

development of BBK

is related with

institutions

PART 1 -- Page 5

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

There is also concern from investors for the need of tax holiday, as

other FTZs provide this facility. At this time the government does not

give tax holiday. However, the government selectively can give tax

incentive for certain manufacturing that needs promotion.

FTZ BBK SWOT Analysis 2009-2012

Competition from other industrialzones especially in Johor MalaysiaThe Changing on Singapore'seconomic dynamismThe barriers on trade whichdiscourage economic development

Massive capital inflow toIndonesiathe Development of ASEAN moresignificant as part of Globaleconomic growth engineThe potential of Indonesia as acenter of shipping and logisticsRelocation companies due toglobalizationRelocation of industries due torising overhead costs in China

Lack of high-tech skilled labor.Lack of integration between businessprocesses and application procedures.Conflicting policies between localgovernment and central government.Lack of policy and infrastructuresupport to train local workers.Low business creation.Limited availability of land for futuredevelopmentLimited basic infrastructure.The absence of innovation industryless than optimal Economic Growthand Investment levelinefficient of Bureaucratic Process.

Strategic locationThe existence of skilled laborSound regional economicrelationships within IndonesiaStrong relationship with SingaporeInternational trade opennessUrban populationRelatively high percapita income

S T R E N G T H S W E A K N E S S E S

O P P O R T U N I T I E S T H R E A T S

There is also concern

from investors for

the need of tax

holiday, as other FTZs

provide this facility

PART 1 -- Page 6

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 between BP and DK also problematic, as DK tends to

intervene in practical issues, instead of just concentrated on strategic

issues. The relationship between FTZ authorities with local government

is also problematic. Local government, whether city/district or

provincial tend to take control of any licenses that should be under

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

movement. Demonstration is quite frequent. The main issue is on

minimum wage and outsourcing. Actually for FDI in general, they do

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.

The labor issue is

related to the trend

of polarization in

labor movement

The relationship

between BP and DK

also problematic, as

DK tends to intervene

in practical issues,

instead of just

concentrated on

strategic issues

PART 1 -- Page 7

Infrastructure development

Batam has adequate infrastructure for the time being, but to be able to

compete with other FTZs in the region, Batam needs improvement in

infrastructure, 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

BBK has to compete with other FTZs in the region to attract FDI. The

main competitors are Waigaoqiao in Shanghai China, Penang and

Johor Iskandar in Malaysia, and Tan Thuan in Vietnam. Table 2 shows

comparison in characteristics, FDI, and labor. It shows that Batam is

losing its competitiveness as shown by FDI. Figure 5 shows incentives

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.

The main

competitors are

Waigaoqiao in

Shanghai China,

Penang and Johor

Iskandar in Malaysia,

and Tan Thuan in

Vietnam.

Batam needs

improvement in

infrastructure,

especially port,

roads, and electricity

PART 1 -- Page 8

Table 2 Characteristics, FDI and Labor in FTZ China, Malaysia, Vietnam and BBK Indonesia

PART 1 -- Page 9

Figure 5: Incentive for FTZ in China, Malaysia, Vietnam and Indonesia

PART 1 -- Page 10

Electrical and electronics industry

Electrical and electronics industry has been developed for quite long

time in Batam. Electrical and electronics is also the main export from

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

BBK.

The opportunity for Batam to follow global value chain of electronics

is enormous. Given the value of electronic market in amount of around

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

The labor issue is

related to the trend

of polarization in

labor movement

The opportunity for

Batam to follow

global value chain of

electronics is

enormous

PART 1 -- Page 11

Table 4 Main Market, Production and Leading Firm of Electronics Procedures

Table 5 Five top Electronics manufacturers

PART 1 -- Page 12

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 13

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 14

Figure 8 Global Supply chain of Shipyard Industry

Figure 9: the Value of Shipyard Industry

PART 1 -- Page 15

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 16

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 17

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 18

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 19

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 20

Roadmap of development of electronics industry in Batam and Bintan

PART 1 -- Page 21

Roadmap for shipyard industry in Batam and Karimun

Roadmap for oil and gas supporting industry in Batam

PART 1 -- Page 22

Roadmap for data storage, and network system in Batam

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.

PART 2 -- Page 1

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 2

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 3

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 4

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 5

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 6

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 7

Table 2: “Made in China” retail pricing structure of a personal computer

Product Manufacturer Manufactured

Location

Ratio of retail pricing

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

margin

----- ----- 10

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 8

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/

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

PART 2 -- Page 9

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 10

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 11

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 12

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 13

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 14

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 15

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 16

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 17

2.1 Competitiveness Ranking of 33 Indonesian Provinces – Rank and Score by

Environment (Year 2010)

Table 2: Overall Competitiveness

Ranking

Rank Province Score

1 DKI Jakarta 1.7576

2 Jawa Timur 0.6644

3 Kalimantan Timur 0.5523

4 Jawa Barat 0.5113

5 Jawa Tengah 0.4282

6 DI Yogyakarta 0.2757

7 Banten 0.2343

8 Kepulauan Riau 0.1708

9 Bali 0.1371

10 Riau 0.1152

11 Sulawesi Selatan 0.0993

12 Sumatera Selatan 0.0816

13 Kalimantan Selatan 0.0146

14 Sulawesi Utara -0.0259

15 Gorontalo -0.1130

16 Aceh -0.1444

17 Sumatera Barat -0.1559

18 Sulawesi Tenggara -0.1655

19 Sumatera Utara -0.1683

20 Lampung -0.1956

21 Sulawesi Barat -0.2062

22 Kalimantan Barat -0.2273

23 Sulawesi Tengah -0.2311

24 Papua -0.2378

25 Jambi -0.2506

26 Kalimantan Tengah -0.2681

27 Bengkulu -0.2735

28 Nusa Tenggara Barat -0.2969

29

Kepulauan Bangka

Belitung -0.3085

30 Papua Barat -0.3179

31 Maluku -0.3438

32 Maluku Utara -0.5107

33

Nusa Tenggara

Timur -0.6014

Table 2 for Overall Competitiveness,

Kepulauan Riau is ranked at the 8th

position, meaning that it can be considered

as part of provinces within the “high

competitiveness” group. The province

performs slightly better than Bali, but

below Banten. These three provinces, in

fact, obtained standardised scores which

are not far off from each other (between

0.2343 and 0.1371).

Kepulauan Riau is healthily ahead of other

Sumatran provinces. Its closest neighbour

and also parent province, Riau, stands two

ranks below at 10th place with a

standardised score gap of 0.0556 points.

Kepulauan Riau’s Overall

Competitiveness is influenced by its four

environments. In three of the environments,

Kepulauan Riau maintains its rank in top

third of 33 provinces.

Most outstanding contrast, however is the

province’s attainment for Government and

Institutional Setting where it rests at the

bottom third of the table of 33 province.

PART 2 -- Page 18

Table 3: Macroeconomic Stability

Ranking

Rank Province Score


2 Jawa Timur 0.9111

3 Jawa Barat 0.9083




7 Banten 0.2649

8 Bali 0.1384

9 Riau 0.1354

10 Sumatera Utara 0.0246

11 Papua -0.1051

12 Kalimantan Selatan -0.1147

13

Kepulauan Bangka

Belitung -0.1313

14 Jambi -0.1688

15 Sulawesi Selatan -0.1794

16 Sumatera Selatan -0.1842

17 Lampung -0.1864

18 DI Yogyakarta -0.2399





23 Maluku -0.3003






29 Nusa Tenggara Timur -0.4298

30 Bengkulu -0.4402



33 Aceh -0.5025

In Table 3 for Macroeconomic Stability

environment, Kepulauan Riau is ranked

fifth. However, looking at the standardised

scores, for Kepulauan Riau to catch up, a

wide gap is visible between the province’s

score and that of Kalimantan Timur which

is placed fourth.

At the same time, the province edges only

slightly ahead of Jawa Tengah at sixth

place.

Nevertheless, the archipelago may be seen

to be most stable in the Sumatra Economic

Corridor. It is four ranks ahead of Riau,

the next highest placing province within

the corridor.

PART 2 -- Page 19

Table 4: Government and Institutional

Setting Ranking

Rank Province Score


2 Jawa Timur 0.6534



5 Banten 0.5031



8 Gorontalo 0.4271

9 Jawa Barat 0.3625

10 Sulawesi Utara 0.2574


12 Sulawesi Barat 0.2303

13 Aceh 0.1396

14 Sulawesi Tengah 0.0478

15 Sulawesi Tenggara 0.0181

16 Bali 0.0061

17 Kalimantan Timur -0.0068



20 Bengkulu -0.1314

21 Lampung -0.2175

22 Papua -0.2407



25 Jambi -0.3454

26

Kepulauan Bangka

Belitung -0.3558

27 Riau -0.4048


29 Kepulauan Riau -0.4536




33 Maluku -0.7544

In Table 4, in contrast to other

environments where the province ranks in

top one-third of 33 provinces, Government

and Institutional Setting environment,

Kepulauan Riau as a province is ranked

29th, quite some distance down among 33

provinces. Comparing against provinces

within Sumatra Economic Corridor, only

Sumatra Utara is ranked lower than

Kepulauan Riau.

PART 2 -- Page 20

Table 5: Financial, Businesses and

Manpower Conditions Ranking

Rank Province Score



3 Jawa Timur 0.8620


5 Jawa Barat 0.6432

6 Riau 0.5555

7 Papua 0.1643



10 Lampung -0.0323

11 Maluku -0.0495

12 Sulawesi Selatan -0.0645

13 Bali -0.0778





18 DI Yogyakarta -0.1720




22 Banten -0.1838

23 Aceh -0.2005



26 Bengkulu -0.2906

27 Kalimantan Selatan -0.2954


29 Jambi -0.3297



32

Kepulauan Bangka

Belitung -0.5167


Table 5 for Financial, Businesses and

Manpower Conditions, in contrast to the

government sector, Kepulauan Riau as a

province is ranked ninth. This is an

indication of a strong private sector

leading competitiveness drive of the

province.

However, a closer observation on the

scores shows a fairly large gap between

Kepulauan Riau with Sumatera Selatan,

another province within the Sumatera

Economic Corridor, which is ranked a

notch higher.

This would group Kepulauan Riau (0.0540)

within the same band as another

neighbouring province, Lampung (0.0323)

and maybe even, Maluku (0.0495).

However, among archipelagic provinces

(Bali, Kepulauan Bangka Belitung,

Kepulauan Riau, Maluku, Maluku Utara,

Nusa Tenggara Timur & Nusa Tenggara

Barat), Kepulauan Riau takes the lead

indicating astrong confidence and viability

by the private sector.

PART 2 -- Page 21

Table 6: Quality of Life and

Infrastructure Development Ranking

Rank Province Score





5 Bali 0.4818

6 Banten 0.3528

7 Sulawesi Utara 0.2462

8 Jawa Timur 0.2310



11 Riau 0.1749

12 Jawa Barat 0.1311


14 Sumatera Barat 0.1156

15 Sumatera Utara 0.0276

16 Aceh -0.0142

17 Sumatera Selatan -0.0526


19 Jambi -0.1584


21

Kepulauan Bangka

Belitung -0.2303

22 Bengkulu -0.2318


24 Maluku -0.2710


26 Lampung -0.3463







33 Papua -0.7695

In Table 6 for Quality of Life and

Infrastructure Development, Kepulauan

Riau as a province is ranked third, just

after DI Yogyakarta at second place and

DKI Jakarta at first place. This is no mean

feat. While any attempt to push further the

attainment in this environment may not

place the province higher up the ranks, it

will definitely strengthen its competitive

position as an attractive draw for its

residents to stay and take advantage of the

many presenting opportunities. This is

especially important considering that

Kalimantan Timur only slips narrowly in

fourth placing behind Kepulauan Riau.

Being in close proximity to Singapore and

Johor Bahru, Malaysia, the province has

done well to level up with the more

established provinces in first and second

placing.

PART 2 -- Page 22

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

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.

-2-1012345

Regional EconomicVibrancy

Openness To Trade andServices

Attractiveness To ForeignInvestors

Government Policies andFiscal Sustainability

Institutions, Governanceand Leadership

Competition, RegulatoryStandards and Rule of Laws

Financial Deepening andBusiness Efficiency

Labour Market Flexibility

Productivity Performance

Physical Infrastructure

TechnologicalInfrastructure

Standard of Living,Education and Social…

Median Kepulauan Riau

PART 2 -- Page 23

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

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

-2-1012345

Regional EconomicVibrancy

Openness To Trade andServices

Attractiveness To ForeignInvestors

Government Policies andFiscal Sustainability

Institutions, Governanceand Leadership

Competition, RegulatoryStandards and Rule of Laws

Financial Deepening andBusiness Efficiency

Labour Market Flexibility

Productivity Performance

Physical Infrastructure

TechnologicalInfrastructure

Standard of Living,Education and Social…

Max Kepulauan Riau

PART 2 -- Page 24

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 25

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).

Table 7. SWOT Analysis of Kepulauan Riau

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).

ACI 33 Indonesia Provinces Competitiveness Index 2010

SWOT Analysis of Kepulauan Riau

-0.46

0%

25%

50%

75%

100%

-0.81 -0.56 -0.31 -0.06 0.19 0.44

Threat

1.48

0%

25%

50%

75%

100%

-0.75 0.25 1.25 2.25

Opportunity

WeaknessStrength

* Corruption Perception Index* Prevalence of Corruption

* Crime Rate* Labour Relations* Earthquakes with 5.0+ RS

* Openness to Trade & Services* Attractiveness to FDI

0 +-0 +-

Rank 20% Strongest Indicators Score Environment

1 Populaton Growth 4.3390 QLID

2 Urban Population Growth 3.4003 QLID

3 Openness To Trade 3.1415 MS

4 Secondary Industry (%) 2.5359 MS

5 Urban Population 2.2267 QLID

6 Consumer Price Index 1.9621 MS

7 Populaton Per Number of Hospitals & Public Health Centers 1.8825 QLID

8 Gini Ratio 1.8771 QLID

9 Households With Handphone 1.8675 QLID

10 Mean Years of Schooling 1.5890 QLID

11 Population Per Number of Medical Workers 1.4600 QLID

12 Internet Subscribers in Office 1.3892 QLID

13 Households With Laptop Computer 1.1818 QLID

14 Internet Subscribers in House 1.1631 QLID

15 Human Development Index 1.0968 QLID

16 Households With Phone 1.0585 QLID

17 School Enrollment Rate (Senior) 1.0256 QLID

18 GRDP Per Capita 1.0011 MS

Rank 20% Weakest Indicators Score Environment

74 Labour Force -0.5464 FBMC

75 GRDP Growth -0.5727 MS

76 Ease of Dealing With Banks -0.6239 FBMC

77 Adult Illiteracy Rate -0.6307 QLID

78 Government Inclusiveness and Accountability -0.6352 GIS

79 Primary Sector Employment -0.7031 FBMC

80 Government Effectiveness -0.7168 GIS

81 Perception of Quality of Life -0.7189 QLID

82 Length of (Paved) Roads (Total) -0.7754 QLID

83 Crime Rate -0.7810 GIS

84 Vibrancy of Competition and Collaboration -0.7900 GIS

85 Tertiary Industry (%) -0.8351 MS

86 Labour Relations -0.9223 FBMC

87 Prevalence of Corruption -1.0516 GIS

88 Regulatory Quality -1.1527 GIS

89 Primary Industry (%) -1.3515 MS

90 Firms' Strategy -1.3565 FBMC

91 Firms' Performance -1.6994 FBMC

PART 2 -- Page 26

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 27

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 28

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 29

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 score5

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 30

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)

Province

Rank Score

Before After Before After

Aceh 16 10 -0.1444 0.1184

Bali 9 6 0.1371 0.2792

Banten 7 6 0.2343 0.3931

Bengkulu 27 15 -0.2735 -0.1121

DI Yogyakarta 6 5 0.2757 0.4263

DKI Jakarta 1 1 1.7576 1.9788

Gorontalo 15 13 -0.1130 0.0670

Jambi 25 15 -0.2506 -0.0910

Jawa Barat 4 3 0.5113 0.6594

Jawa Tengah 5 3 0.4282 0.5718

Jawa Timur 2 2 0.6644 0.7661

Kalimantan Barat 22 15 -0.2273 -0.1027

Kalimantan Selatan 13 9 0.0146 0.1336

Kalimantan Tengah 26 15 -0.2681 -0.0784

Kalimantan Timur 3 2 0.5523 0.6891

Kepulauan Bangka

Belitung 29 16 -0.3085 -0.1383

Kepulauan Riau 8 6 0.1708 0.3392

Lampung 20 15 -0.1956 -0.0372

Maluku 31 15 -0.3438 -0.0748

Maluku Utara 32 30 -0.5107 -0.3179

Nusa Tenggara Barat 28 15 -0.2969 -0.1141

Nusa Tenggara Timur 33 31 -0.6014 -0.3431

Papua 24 12 -0.2378 0.0837

Papua Barat 30 15 -0.3179 -0.0666

Riau 10 6 0.1152 0.3096

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

Table 8 for Overall

Competitiveness, simulating

a situation where Kepulauan

Riau’s weakest 20%

indicators are brought up to

average scores of all 33

provinces, it improves in

ranking from eighth to sixth.

This may seem like a

marginal rise, but keeping the

momentum to upgrade is

crucial. Its positive score also

improves.

A small jump means that

Kepulauan Riau is already

starting from a good position.

But improving in scores

0.1708 to 0.3392 is necessary

as there is a lot of potential to

be realised.

PART 2 -- Page 31

Table 9: What-if Competitiveness Simulation Analysis

on Macroeconomic Stability Competitiveness Ranking

and Score (Year 2010)

Province

Rank Score


Aceh 33 21 -0.5025 -0.2735

Bali 8 8 0.1384 0.2595

Banten 7 6 0.2649 0.3522

Bengkulu 30 21 -0.4402 -0.2589

DI Yogyakarta 18 11 -0.2399 -0.0551

DKI Jakarta 1 1 3.2084 3.2960

Gorontalo 27 24 -0.3925 -0.3266

Jambi 14 14 -0.1688 -0.1461

Jawa Barat 3 2 0.9083 0.9856

Jawa Tengah 6 6 0.2862 0.3658

Jawa Timur 2 2 0.9111 0.9529


Kalimantan Selatan 12 11 -0.1147 -0.0173



Kepulauan Bangka

Belitung 13 11 -0.1313 -0.0981


Lampung 17 17 -0.1864 -0.1864

Maluku 23 18 -0.3003 -0.2120

Maluku Utara 26 26 -0.3765 -0.3765



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 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

In Table 9 for

Macroeconomic Sta bility,

improvement of

Kepulauan Riau’s top 20%

weakest indicators does

not bring the province up

in terms of rank.

It remains at fifth place

even after simulation.

However, as its scores

remain negative, -0.4536

and -0.1300 before and

after policy simulation,

the 10-place jump needs

to be solidified.

PART 2 -- Page 32

Table 10: What-If Competitiveness Simulation (WCS)

Analysis on Government and Institutional Setting

Competitiveness Ranking and Score

(Year 2010)

Province

Rank Score


Aceh 13 4 0.1396 0.6022

Bali 16 13 0.0061 0.1936

Banten 5 4 0.5031 0.5573

Bengkulu 20 14 -0.1314 0.1154

DI Yogyakarta 4 3 0.5193 0.6111

DKI Jakarta 1 1 1.1541 1.3107

Gorontalo 8 4 0.4271 0.5637

Jambi 25 18 -0.3454 -0.0297

Jawa Barat 9 4 0.3625 0.5235

Jawa Tengah 3 2 0.6016 0.6750

Jawa Timur 2 2 0.6534 0.7220

Kalimantan Barat 18 14 -0.0738 0.0618



Kalimantan Timur 17 14 -0.0068 0.1315

Kepulauan Bangka

Belitung 26 24 -0.3558 -0.2530

Kepulauan Riau 29 19 -0.4536 -0.1300

Lampung 21 14 -0.2175 0.1030

Maluku 33 18 -0.7544 -0.0742

Maluku Utara 31 24 -0.6653 -0.2694

Nusa Tenggara Barat 19 14 -0.1249 0.0749


Papua 22 10 -0.2407 0.2978

Papua Barat 28 18 -0.4414 -0.0568

Riau 27 14 -0.4048 0.0550

Sulawesi Barat 12 6 0.2303 0.4419


Sulawesi Tengah 14 13 0.0478 0.1854

Sulawesi Tenggara 15 10 0.0181 0.2561

Sulawesi Utara 10 6 0.2574 0.4405

Sumatera Barat 23 16 -0.2452 0.0081


Sumatera Utara 30 11 -0.5447 0.2383

In Table 10 for Government

and Institutional Setting, a

simulation where

Kepulauan Riau improves

on its 20% weakest

indicators will bring the

province’s rank from 29th

place to 19th place. This is

a 10-step jump, and shows

the area where he province

should concentrate on

improving.

The original position of

29th is not appropriate for a

province as advanced and

competitive as Kepulauan

Riau. However, as its

scores remain negative,

−0.4536 and −0.1300

before and after policy

simulation, the 10-place

jump needs to be solidified.

PART 2 -- Page 33


Analysis on Financial, Businesses and Manpower

Conditions Competitiveness Ranking and Score

(Year 2010)

Province

Rank Score


Aceh 23 10 -0.2005 0.0169

Bali 13 8 -0.0778 0.1226

Banten 22 9 -0.1838 0.0739

Bengkulu 26 23 -0.2906 -0.1885

DI Yogyakarta 18 9 -0.1720 0.0487

DKI Jakarta 1 1 1.3993 1.7466

Gorontalo 20 9 -0.1797 0.0885

Jambi 29 18 -0.3297 -0.1684

Jawa Barat 5 4 0.6432 0.7736

Jawa Tengah 4 3 0.7087 0.8609

Jawa Timur 3 3 0.8620 0.8875


Kalimantan Selatan 27 12 -0.2954 -0.0521



Kepulauan Bangka

Belitung 32 16 -0.5167 -0.1322


Lampung 10 10 -0.0323 -0.0137

Maluku 11 9 -0.0495 0.0889

Maluku Utara 31 31 -0.4830 -0.4047

Nusa Tenggara

Barat 28 24 -0.3086 -0.2513

Nusa Tenggara

Timur 33 25 -0.5380 -0.2810

Papua 7 7 0.1643 0.3280

Papua Barat 17 10 -0.1465 -0.0172

Riau 6 5 0.5555 0.6690

Sulawesi Barat 19 19 -0.1739 -0.1739

Sulawesi Selatan 12 9 -0.0645 0.1045

Sulawesi Tengah 24 18 -0.2495 -0.1554


Sulawesi Utara 30 20 -0.3552 -0.1784

Sumatera Barat 15 14 -0.1208 -0.0952


Sumatera Utara 21 10 -0.1806 0.0126

Table 11 for Financial,

Businesses and Manpower

Conditions, with policy

simulation Kepulauan Riau is

able to rise to seventh position,

compared ninth position it

held previously.

It remains at a better place

among top-10 creme de le

crème is important. It cannot

let confidence and credibility

slip, both ranking and scores

matter. This leap in ranking

may seem minor, but it

improves score from 0.0540 to

0.2400, or by about 186 basis

points. Competition does get

harder and tougher at the top.

This improvement is certainly

significant to help the province

become more competitive as

an international investment

destination.

PART 2 -- Page 34


Analysis on Quality of Life and Infrastructure

Development Competitiveness Ranking and Score

(Year 2010)

Province

Rank Score


Aceh 16 12 -0.0142 0.1280

Bali 5 5 0.4818 0.5799

Banten 6 5 0.3528 0.5893

Bengkulu 22 19 -0.2318 -0.1165

DI Yogyakarta 2 2 0.9952 1.1006

DKI Jakarta 1 1 1.2684 1.5618

Gorontalo 25 17 -0.3070 -0.0577

Jambi 19 17 -0.1584 -0.0196

Jawa Barat 12 6 0.1311 0.3550

Jawa Tengah 13 6 0.1161 0.3854

Jawa Timur 8 5 0.2310 0.5020





Kepulauan Bangka

Belitung 21 18 -0.2303 -0.0698


Lampung 26 17 -0.3463 -0.0518

Maluku 24 19 -0.2710 -0.1021

Maluku Utara 31 21 -0.5181 -0.2209



Papua 33 25 -0.7695 -0.3118

Papua Barat 28 19 -0.4327 -0.1259

Riau 11 7 0.1749 0.2753

Sulawesi Barat 30 18 -0.4830 -0.1058


Sulawesi Tengah 23 18 -0.2455 -0.0587

Sulawesi Tenggara 18 15 -0.0932 0.0414

Sulawesi Utara 7 7 0.2462 0.3192

Sumatera Barat 14 10 0.1156 0.2211

Sumatera Selatan 17 15 -0.0526 0.1066

Sumatera Utara 15 11 0.0276 0.1914

Table 12 for Quality of Life

and Infrastructure

Development, Kepulauan

Riau is already competitive

for Indonesia’s standards, and

it remains at third place even

after simulation. When a

province is already doing

well, improvement in rank

gets tougher, but

improvement in score is

always possible, no matter

how marginal.

If Kepulauan Riau, or BBK

SEZ specifically, is targeting

itself to become a “prominent

investment destination in

Asia Pacific”, as it stated in

its official document, then it

should not be satisfied with a

relatively good position

compared to other Indonesian

provinces. It should, instead,

aim to be better and improve

to aim for international

standards.

PART 2 -- Page 35

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 36

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 37

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 38

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 39

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 40

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 41

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 42

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 43

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 44

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 45

Proposed Heavy Engineering Industrial Cluster Analysis B ：

Proposed Shipping & Logistic Cluster Analysis C：

PART 2 -- Page 46

Proposed Electronics Cluster Analysis D：

Proposed Aircraft, Automobiles & Precision Engineering Cluster Analysis E：

PART 2 -- Page 47

Proposed General Supporting Industries Cluster Analysis F：

Proposed General Export Processing Cluster Analysis G：

PART 2 -- Page 48

Proposed Information & Communication Technology Cluster Analysis H：

Proposed Agricultural Processing Cluster Analysis I：

PART 2 -- Page 49

Proposed Tourism Cluster Analysis J：

Proposed Construction Cluster Analysis K：

PART 2 -- Page 50

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 51

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 52

(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 53

APPENDIX

COMPARATIVE EVALUATION ON RELATIVE COMPETITIVENESS OF

REGIONAL SPECIAL ECONOMIC / INDUSTRIAL ZONES: A SWOT ANALYSIS

AND ROLE OF THE GOVERNMENT

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