Overview of Special Economic Zones and Integrated Industrial Zones in Indonesia

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By:

Team of Hukumindo

Previously, the www.hukumindo.com platform has talk about "Iwa Kusumasumantri, Mantan Menteri dan Rektor yang Pernah Mendirikan Kantor Hukum", "Sharia Investment: Definition, Characteristics, Types, and Benefits", "Understanding 5 Steps Foreign Direct Investment In Indonesia" you may read also "Is the Property Sector in Indonesia Open to Foreign Investment?" and on this occasion we will discuss about 'Overview of Special Economic Zones and Integrated Industrial Zones in Indonesia'.

What is Investment?

Investment-or in other terms it is also known as investment-has a broad meaning, which is an activity to obtain profit in the future. According to Article 1 paragraph (1) of Law No. 25 of 2007 concerning Investment ("UU 25/2007") defines investment as all forms of investment activities, both by domestic investors and foreign investors to do business in the territory of Indonesia. Republic of Indonesia. From Law 25/2007 it is known that investment or investment is divided into two types, namely Domestic Investment (PMDN) and Foreign Investment (PMA). Domestic Investment is an investment activity in Indonesia by fully using domestic capital and carried out by domestic investors. Meanwhile, foreign investment is an activity to invest in Indonesia carried out by foreign investors, either using foreign capital wholly or jointly with domestic capital.[1]

Foreign investment in Indonesia is generally divided into several sectors. Broadly speaking, foreign investment in Indonesia focuses a lot on the development, tourism, mining, transportation and product sectors. The sector is determined according to the potential of each region in Indonesia. For example, islands such as Bali and Lombok can attract foreign investors in the tourism sector because their infrastructure is sufficient. Foreign investors can invest by building hotels and tourist attractions.[2]

There is also investment in the refined palm oil product sector. On islands such as Sumatra and Kalimantan, oil palm can thrive. Foreign investors can build palm oil processing factories to advance the local economy. Apart from that, the areas that attract the attention of many foreign investors are mining and natural resources such as minerals, liquefied natural gas, coal and petroleum. The large amount of potential makes foreign investors compete to invest by establishing companies and factories in Indonesia. Even so, foreign investment in Indonesia must be carried out in an orderly manner and in accordance with investment laws. Don't let foreign investment harm the land and the Indonesian nation in the future.[3]

One of the main reasons why Indonesia needs foreign investors is people's consumption power and the export trend which is still low. Industrial area infrastructure and economic support sectors can of course consume a large budget. Meanwhile, Indonesia does not yet have enough savings to fund the development from its own pocket. That way, development cannot rely on domestic investment alone.[4]

Foreign investors who invest by building companies or factories in Indonesia are expected to be able to absorb the local workforce maximally. By employing local human resources, foreign companies operating in Indonesia can educate workers about product quality, production technology, and a good work ethic. So, investment is not only made for economic interests, but also builds intellectual investment for the workforce. Foreign investment will automatically increase the number of exports, especially in the product sector. In the tourism sector, the rapid development of tourist destinations will attract foreign tourists to come so that it will increase the country's foreign exchange earnings.[5]

Indonesia's Efforts to Attract Foreign Investors

In business, a strategic and profitable company location is a top priority. Adequate infrastructure is also a supporting factor. With a good location and infrastructure, the company's business activities become more effective. To attract foreign investors, the Indonesian government has started preparing locations with appropriate infrastructure. In addition, the government is also willing to provide several fiscal facilities and ease of licensing related to company activities.[6]

The placement locations for foreign investors are divided into two types, namely Special Economic Zones and Integrated Industrial Zones. With different functions and purposes, these two types of locations are spread all over Indonesia.

Special Economic Zones (KEK)

Currently, Indonesia has prepared 9 Special Economic Zones (KEK) and around 13 Integrated Industrial Zones. This figure is expected to continue to increase along with the hectic investment in Indonesia. The following are SEZs that are ready to operate in Indonesia:[7]

1. KEK Tanjung Kelayang;
2. KEK Tanjung Lesung;
3. KEK Maloy Batuta Trans Kalimantan;
4. KEK Sei Mangkei;
5. KEK Mandalika;
6. KEK Morotai;
7. KEK Bitung;
8. KEK Tanjung Api-Api;
9. KEK Palu.

The definition of SEZ or KEK (Kawasan Ekonomi Khusus) itself is an area that has special advantages in terms of geostrategy and geoeconomics. This advantage is enabled to support industrial, export and trade activities in the region. Careful SEZ preparations are also aimed at attracting domestic and foreign investors.[8]

With the influx of foreign investment and the development of business turnover, SEZ is also expected to be able to absorb the workforce around the area. So, all potential resources in the area can be put to good use and in accordance with state regulations. Each SEZ has a focus on a different sector. For example, Tanjung Lesung SEZ which is better prepared as a special tourism area. Foreign investors can develop businesses related to tourism such as hotels, inns or tourist attractions.[9]

Another example is SEZ Sei Mangkei in North Sumatra which focuses on plantations. With fertile land, Sei Mangkei could provide a large supply of palm oil and rubber. Foreign investors can set up a palm oil processing factory in this area. Even though currently the government is only preparing 9 SEZs in Indonesia, other regions can submit proposals to become part of the Special Economic Zones. Submissions must be made by local governments, provincial governments, or private business entities. One of the advantages that can be obtained by companies investing in SEZs is the ease of licensing, tax convenience, and guaranteed availability of workers. Often times, bureaucratic licensing and taxation prevent investors from investing in Indonesia.[10]

Integrated Industrial Area (KIT)

Apart from Special Economic Zones, Indonesia has also prepared dozens of Integrated Industrial Zones which also aim to attract foreign investors. Some of these areas are already operating in various regions in Indonesia. Currently, the island that has the most integrated industrial areas is Java Island. In contrast to SEZs, industrial estates place more emphasis on the convenience of doing business through well-organized facilities and infrastructure.[11]

Oftentimes, Integrated Industrial Estates not only have large areas of land for factories and manufacturing, but also have commercial areas such as shopping centers and housing. The following are 13 integrated industrial estates that are already operating:[12]

1. Kendal Industrial Area. With a location of 700 hectares, this area in Central Java is an investment area for automotive parts and furniture manufacturing companies.
2. New Semarang Hill Industrial Area. Located in Central Java, this industrial location still has 40 hectares of land that can be utilized by foreign investors. In this area, the government wants to focus on industrial activities that are free from waste. So, only companies that can meet environmental friendly requirements can open a business in this area.
3. Wijayakusuma Industrial Area. Located in Central Java, this 100 hectare plot of land has become a home for a garment company, housing and warehousing center.
4. Java Integrated Industrial and Port Estate (JIIPE). With an area of ​​1,761 hectares, JIIPE already operates heavy equipment, automotive and fertilizer manufacturing companies.
5. Bantaeng Industrial Area. One of the industrial areas in South Sulawesi has an area of ​​3,000 hectares which is ready to be used for a mineral processing company.
6. Cikande Modern Industrial Area. With an area of ​​1,800 hectares, this area in West Java is home to electronics and electrical component factories.
7. Wilmar Integrated Industrial Estate. This area has ready-to-use land of 800 hectares. Companies that are already operating in this area are food processing factories.
8. Cilegon Industrial Area. Located in the western part of Java Island, this industrial area has a land area of ​​570 hectares which is ready for use. Several companies already operating in this area are involved in the steel, mineral and chemical sectors.
9. Bekasi Fajar Industrial Area. With a land area of ​​300 hectares, Bekasi Fajar provides land and infrastructure for companies wishing to invest and build factories in the area.
10. Delta Silicon Industrial Area. Located in West Java, this 158 hectare area is now home to manufacturers of automotive parts, vehicles, electronics and food.
11. Karawang International Industrial Area. Karawang is already well-known as an integrated industrial area in West Java. With 293 hectares of ready-to-use land, there are now companies manufacturing food, vehicles, automotive parts and sanitation products in Karawang.
12. Suryacipta City of Industry. In this area in West Java, you can find companies engaged in the production of tires, car batteries and plastics.
13. GT Tech Park Industrial Area. Still in West Java, in this industrial area there are companies producing tires and automotive parts.

In addition to location and infrastructure, the Integrated Industrial Estate also has almost the same administrative facilities as KEK. The government provides licensing, taxation and employment facilities for companies operating in the area. Here are some of the conveniences that investors can enjoy:[13]

1. Ease of licensing. To build a factory, of course, investors need to have an investment permit, principle permit, safety and environmentally friendly permit, building permit, due diligence, and complete company documents.
2. With the Ease of Direct Construction Investment Services (KLIK), investors only need to take care of investment permits before starting construction. It must be admitted that issuing environmental permits such as the AMDAL and permits such as the Building Construction Permit (IMB) takes a long time.
3. If in the past development could be hampered due to permit issues, now investors do not have to wait long for these permits to be issued to start construction. The condition is that these permits are still being processed in parallel and must be completed before construction is completed. Without these permit documents, the company's commercial activities cannot begin even though the building construction is ready.
4. Tax convenience. Some machines, materials and raw materials for production may not be available in Indonesia. If the machine, materials and raw materials in question can only be obtained abroad, BKPM provides tax convenience by waiving fees and import taxes on these goods.
5. Of course, this will ease the process of entering goods and make it easier for the company to continue operating. Even so, to get this tax facility, companies must meet several conditions and obtain a recommendation from the Directorate General of Taxation.
6. Ease of employment. The government guarantees that companies can get ready-to-work human resources from around the company's location. This is of course a good solution because companies can create jobs and Indonesian workers can be put to good use.

Although each region has its own advantages, the types of businesses in the Integrated Industrial Estate are not limited. For example, the Karawang international industrial area is home to a wide variety of manufacturers ranging from food, tires, automotive parts, vehicles, to sanitation products. Both the SEZ and the Integrated Industrial Zone must be developed so that they can provide comfort for companies and investors operating in the area. Infrastructure such as road access, transportation, housing, and commercial areas need to be developed to create an integrated industrial area. Some areas also have facilities such as seaports and airports to facilitate company activities and mobility. With an adequate transportation system, export activities, goods delivery, and trade can run smoothly.[14] And if you have any legal issue with this topic, contact us then, feel free in 24 hour, we will be happy to assist you. 

*) For further information please contact:

Mahmud Kusuma Advocate

Law Office

Jakarta - Indonesia.

E-mail: mahmudkusuma22@gmail.com

________________

References:

1. "Panduan Investasi Asing di Indonesia", smartlegal.id, Diakses pada tanggal 14 Januari 2023, Link: https://smartlegal.id/badan-usaha/2019/03/05/investasi-asing-indonesia/

2. "Perkembangan Serta Manfaat Investasi Asing di Indonesia", bplawyers.co.id., Diakses pada tanggal 14 Januari 2023, Link: https://bplawyers.co.id/2017/09/08/perkembangan-manfaat-investasi-asing-di-indonesia/

3. Ibid.

4. Ibid.

5. Ibid.

6. Ibid.

7. Ibid.

8. Ibid.

9. Ibid.

10. Ibid.

11. Ibid.

12. Ibid.

13. Ibid.

14. Ibid.