Interview with Ismeth Abdullah, first Governor of Riau Islands Province, Indonesia

with Keith W. Rabin

Congratulations Pak Ismeth on your recent election as the first Governor of the newly-created Riau Islands Province. That is a great achievement. Can you tell our readers a little about your background and how you came to assume this position?

First of all, thank you very much. It is certainly a privilege to be directly elected by the people of the Riau Islands Province (Kepulauan Riau or KEPRI) where I will serve as Governor for the next five years (2005 – 2010), together with Vice Governor, Mr. Mohammad Sani, the former Regent of Karimun.

Prior to this election I served as Chairman of the Batam Industrial Development Authority (BIDA) from 1998 – April 2005. As you know Batam is located within the Riau Islands Province and is the primary industrial center of Indonesia. In July 2004, I was also honored to be appointed as Acting Governor of the Province for about eight months, while the central government planned for national direct elections on the provincial level. This is part of a government effort to begin practicing direct elections for positions such as President, Parliament members, Governor, Mayor, Regent, etc. in Indonesia.

Having served as both the Chairman of BIDA and Acting Governor of the province, I was able to familiarize myself with the region, which includes Bintan, Batam, Karimun, Lingga and Natuna Regency. Believing I could make a major contribution to the region, I decided to run for Governor and was elected on June 30, 2005.

During your campaign, the status of Batam (an island located within the Riau Islands Province) as a Free Trade Zone (FTZ) was clarified. This entailed awarding the whole island, rather than specific parts, FTZ status. As the former Chairman of the Batam Industrial Development Authority (BIDA) you must have been very pleased by this announcement. Can you tell us why this was necessary, and what it means to investors and businesses moving forward? Can you also tell us how your own relationship with Batam will change as you assume this new position?

The recent ruling now means the entire island of Batam, rather than certain parts, is recognized as a bonded area. This means all imported goods for production purposes, such as capital goods and raw materials, are exempted from import taxes. Batam is specifically designed to be an export processing zone, as well as export-oriented industrial area, so as not compete with other industrial areas, which market their products within Indonesia. This designation provides greater clarity and allows greater confidence from foreign investors and business people, who are now able to conduct and/or expand their businesses in Batam, who no longer have to monitor transshipments on the island, lest they find themselves losing the duty-free exemption. This is likely to further increase foreign investment into Batam from its current level of approximately US$ 11.53 billion.

Since its establishment in 1978, the success of Batam has made it into a role model – not only within the province – but the whole of Indonesia as well as the region. Our goal is to develop other regencies within the province so that they might succeed in the same manner – as well as to proceed with the continuing development of Batam itself.

Batam is one of the most established and successful FTZ’s in Asia. At the same time, however, it remains largely unknown outside the region. The Riau Islands attracts even less attention. They remain largely undeveloped, despite their natural beauty and strategic location within the center of rapidly developing ASEAN markets and major shipping lanes. Do you have any thoughts as to why this is the case, the types of opportunities that can be found there, and the sectors you are targeting for future development?

By the end of December 2004, Batam had attracted more than 766 foreign companies operating in Batam and accumulated a total of approximately US$ 11.53 billion in investment. Some well-known names include CIBA Vision, Epson, Panasonic, Phillips, Sanyo, Perkin Elmer, McDermott, and Advanced Interconnect Technology.

Having achieved this success, over the past few years, Batam has begun to reach out to new investors by participating in various exhibitions, seminars and road shows in Japan, Europe, Australia and the United States. This is also helping us to generate media exposure that recognizes our economic potential and achievements. With the formation of the Riau Islands Province, we are now expanding our focus to highlight the abundant opportunities that exist in tourism, the oil and gas industries, fisheries, agricultures, transshipment and other areas. Many of these areas have not yet been developed or recognized, by outside investors.

Our vision is to establish the Riau Islands Province as a center of national economic growth. Through the development of sectors such as those highlighted above, we plan to raise living standards, the attractiveness of doing business here and the quality of our work force. While we have not yet generated recognition commensurate with our potential or our successes, I am confident this will come over time. For now, however, investors benefit as they are able to achieve the better terms and conditions possible before the value is more fully realized.

Batam has traditionally been an industrial center with a largely transient population, recruited across Indonesia, who return home after a few years of hard work. With its rapid growth, however, Batam has grown far from its roots as a small fishing village. As a result, in recent years many people are beginning to consider Batam as their long-term home. This has led to the formation of international schools, a technical college, luxury homes, facilities for expatriates, better hospitals, shopping centers and other trappings of modern life. Can you comment on this trend and both the opportunities and challenges arising from this rapid development?

Batam was a humble logistic center in 1978, serving a small group of oil and gas exploration and production companies. Today, Batam has transformed itself into one of the major industrial hubs and investment magnets in Asia. When one includes the extension of Rempang and Galang Island, the area now includes a total area of 715 sq-km. Over the years, population growth has been quite dramatic, from under 10,000 or so people in the 1970s to almost 600,000 people today. Batam has also become one of the growth engines of Indonesia. It provides employment for over 220,000 workers, and more than 900 billion Rp annually in income taxes to the central government. Support from the government has been tremendous as well. It has helped to ensure the sustainable development of the island. The autonomous status of Batam also provides more flexible and simpler procedures and planning. This allows us to efficiently respond to the needs of foreign investors, tourists and residents.

Development of the region is being achieved through a Master Plan, designed to utilize the space and contour of each island for maximum advantage. Ideal population levels and facilities usage in each of the eight sub-regions of development have been outlined. This includes the distribution of workers and population, based on land capacity and business activities, which determines the optimal allocation of housing facilities. The Master Plan is also reviewed constantly to ensure that actual development conforms to the plan, as well as to account for new trends and developments, so that necessary revisions can be made.

Despite this thorough planning, there are still challenges that need to dealt with due to this rapid development. This includes migration control, to allow Batam to manage the numerous job seekers who are arriving from all parts of Indonesia, as well as squatter settlements and human trafficking. Hence, Batam continues to strive and change, in order to resolve our problems and to create the most conducive and productive climate possible.

The Riau Islands province was only formed a little over a year ago. Can you tell us why a decision was made to incorporate these islands into an independent province? In addition, given many of the islands are small and transportation between them difficult, can you talk about the opportunities that can be found there, as well as the challenges of initiating a balanced development plan, particularly when the provincial economy is dominated by industrial activity on Batam, tourism in Bintan and oil and gas exploration in Natuna?

The Riau Islands Province was established on July 1, 2004 by the government of Indonesia from land formerly incorporated within the province of Riau. Due to its strategic location, close proximity with Singapore and International borders and the unique needs of the hundreds of islands that comprise the archipelago, the Central Government decided it would be better served if incorporated into a new province. This allows better supervision and more attention to the development needs of this area.

Each of the regencies incorporated in the Riau Islands Province has its own opportunities that can be offered to potential investors. For example, the Regency of Kepulauan Riau offers prospects in industry, mining, agribusiness, housing, fisheries, water resources and tourism. The Regency of Karimun offers opportunities in shipyards, industry, agribusiness, fisheries, mining, and tourism. The Regency of Natuna focuses on fisheries, farming and plantations, animal husbandry, mining and tourism. The Regency of Lingga allows opportunities in agro-industry, animal husbandry, tourism and industry. The City of Tanjung Pinang possesses potential in industry, shipbuilding, fisheries and tourism, and finally the City of Batam, trade and industry, industrial parks, agribusiness and tourism.

Part of the attraction of Batam and the Riau Islands is their proximity to Singapore. Speaking from a New York City perspective, this would be similar to having a large Free Trade Zone with only a fraction of the labor and infrastructure costs of Manhattan on Staten Island with several thousand nearby islands offering tremendous potential for tourism and other industries. Can you tall us about the relationship between Singapore, Batam and the Riau Islands and what it means for foreign investors and businesses?

Batam is indeed a unique place in Indonesia as it has Singapore for a neighbor. Located only 12 miles away, Batam and the Riau Islands and Singapore consider each other partners for growth. This world-class business and financial center provides cutting-edge infrastructure and attractive incentives, combined with the cost savings and enhanced competitiveness that can be achieved through basing facilities within the lower cost structure of Indonesia. In addition, many products manufactured or assembled on Batam qualify as Singaporean under the Singapore-U.S. Free Trade Agreement . This relationship benefits both industrial activities as well as tourism, and Singapore’s advanced facilities have turned the island into a modern city. Many executives now commute between the two on a regular basis. Singaporeans come to work on Batam during the week or visit on weekends to enjoy golfing, good food, our beaches and other activities. At the same time, residents of Batam are able to access services in Singapore or come to enjoy shopping and cultural events. Singapore is also the largest investor in Batam, and around 500, or 2/3, of the foreign companies operating on the island are Singaporean. This allows the option of utilizing legal and accounting firms, schools, hospitals and other facilities – or the alternatives we have been developing on Batam. This has deepened business as well as social relations. As a result more cooperation and mutual agreements have also been reached in areas such as trade and education. Through their expansion into Batam, companies are able to maximize their competitiveness. They are able to reduce investment costs as well as that of their operations. Singapore also serves as a benchmark. It stimulates the province to continue to improve our capabilities and capacity to provide first class services to investors, tourists and trading partners.

Most American executives are unfamiliar with how to do business in Asia and fewer still would be able to recognize what ASEAN stands for and where it is located. Given this lack of awareness, can you talk about the potential of ASEAN and why, given all of the attention presently being accorded to opportunities in China, India and other markets, it is worthy of the attention of international business executives and investors?

Indonesia is a member of ASEAN (Association of the Southeast Asian Nations) . Collectively this is a market of approximately 500 million people with a combined gross domestic product of US$600 billion. It includes other countries such as Brunei Darussalam, Cambodia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. Although the world is currently focusing more attention of China and India, the ASEAN region also holds a lot of potential and is well worth the attention of international executives and investors.

ASEAN, for example, is a leading recipient of Foreign Direct Investment (FDI) inflows in the developing world, with five ASEAN countries in the top 20 developing-countries recipients of long-term global capital flows during the late 1990s. Economies in the region continue to undertake collective, as well as individual, measures to further liberalize their investment regimes and to provide competitive and attractive investment environments. Additional policy measures have been introduced to attract greater FDI flows and to develop the region’s competitiveness as a business and investment destination.

On an individual basis, Indonesia offers qualified investors 100% foreign-equity ownership in wholesale and retail trading companies, as well as all areas of the manufacturing sector. Indonesia has also reduced the processing time required for the approval of investments of less than US$100 million to 10 working days. In addition, listed Indonesian banks are now open to 100% foreign-equity ownership. Brunei Darussalam allows 100% foreign-equity ownership in high technology manufacturing and export industries. Laos allows duty exemptions on imported capital goods required by promoted investment projects. Malaysia offers 100% foreign-equity ownership in the manufacturing sector, with no export conditions imposed on new investments, expansions and diversifications. Myanmar has extended a minimum three-year corporate tax exemption to investment projects in all sectors. The Philippines has opened its retail and distribution sectors to foreign equity, and allows foreign companies to compete in the domestic private construction sector. And Singapore has reduced business costs significantly as part of a package amounting to savings of US$10 billion, in addition to extending a 30% investment tax allowance to industrial projects and to selective service industries. One hundred percent foreign-equity ownership for manufacturing projects regardless of location is also now allowed by Thailand. Finally, Vietnam allows duty exemptions for imported capital goods for all projects.

In addition to these actions, member economies are collectively promoting ASEAN as a single investment area. This includes a general reduction of trade and other barriers with an overall vision of realizing an ASEAN Investment Area by 2010 and the free flow of investments by 2020 . Regional cooperation will facilitate more cost-effective industrial and production activities, providing firms with greater synergy and competitive edge in servicing both global markets. It will also provide better access to this major emerging consumer market as well.

Let me also mention Batam had the pleasure of hosting the First ASEAN People’s Assembly in November 2000. This event was attended by 300 members from ten countries. As the First ASEAN People’s Assembly, Batam was pleased to launch this annual event, which continues to bring together our people, countries and region.

Despite its immense natural wealth, large population, high growth potential, and emergence as the world’s largest Islamic -- though secular-oriented -- democracy, Indonesia in many ways remains a “stealth economy” and rarely receives mention within international media. Can you tell us about the potential of Indonesia, current trends, and why investors and internationally-focused firms as well as policymakers would be wise to pay it more attention?

As a member nation of ASEAN, Indonesia is located on the crossroads of two great continents, Asia and Australia, and the Indian and Pacific Oceans, by which goods move through from Asia to the Middle East, Europe and Africa. Indonesia possesses comparative advantages to investors offering a vast, fertile country endowed with rich and diversified natural resources. This includes a wide range of agricultural products, plantations, fisheries, mining, oil and gas. It also possesses a large population of about 210 million with increasing industrial and consumer needs. This constitutes a huge potential market with an increasingly competitive work force and business environment. It also offers a strategic location control of vital international sea communication lines; a stable democratic government; open market-oriented economy, with free foreign currency exchange regime.

Investment policy in Indonesia is very open to foreign investment. This is indicated by the fact only a small number of sectors are restricted. Many fiscal incentives have also been implemented to attract foreign investors and there is no limitation on the value of investments that can be made. Foreign investors are also now able to wholly own investments in almost every sector and to take advantage of simplified approval processes. The Indonesian Government realizes that investment is one of the most important factors in driving economic growth and, thus, is trying hard to improve investment procedures to stimulate a more favorable investment climate.

When Indonesia is mentioned in international media, it is usually within the context of the potential for terrorism, corruption, natural disasters, piracy, disputes with foreign companies and other negative factors. Do you think this is fair and what would you tell executives and investors that are inclined to pass over Indonesia due to these concerns?

It is true media coverage of Indonesia has focused on negative issues such as the potential for terrorism, corruption, natural disasters, piracy and other issues. This has made some investors hesitant, however, that is not unusual as the media often tends to emphasize negative news over positive achievements. In fact, Indonesia has made rapid advances in recent years, initiating substantial restructuring and reform and many exciting political, economic and social changes. Under the new government of President Soesilo Bambang Yudhoyono (SBY) policies are being established to enhance further progress. This includes efforts to fight terrorism and corruption, improve the people’s welfare, and to provide better public services to Indonesian citizens as well as foreign investors. In addition the nation has truly embraced democracy on the national as well as local level, and our political situation is increasingly stable and security concerns are being addressed.

Despite all the negative coverage, many foreign investors are conducting businesses in Indonesia. They are coming to recognize the significant potential offered within a rapidly developing economy of 210+ million people -- which has gone largely unexplored in comparison with our neighbors. Indonesia is a fertile country, endowed with substantial natural resources. This is increasingly important as worldwide demand and consumption rises with larger numbers of people within China, India and other markets entering the workforce. Indonesia is a huge potential market and offers a competitive work force. It offers a strategic location controlling vital international sea communication lanes. Indonesia is also a democratic country; an open market-oriented economy, with free foreign currency exchange regime. Given that it is also attracting less attention when compared to China and India, there is also less competition. Many also find living conditions and the working environment easier and more pleasant to deal with. Ultimately “seeing is believing” and I urge observers not to believe the tales they have heard. Come and make a personal judgment for yourself. I am confident once they do, you will become attached and recognize the potential of doing business in our country.

The move toward decentralization and localization is quite new in Indonesia as well as many other Asian countries. Can you tell us about the changing relationship between national and local government in Indonesia, the challenges you are facing, and what this means within the Riau Islands in particular?

Although decentralization and localization are quite new in Indonesia, the practice is being adopted rapidly to ensure that government policies are effectively executed. This transition is now taking place and we are working out the lines of decision making, to determine which policies and responsibilities are best handled by local government and which at the national level.

With the newly-created Riau Islands Province we are now urgently moving to implement a far-reaching agenda that will help to create a clean, authorized, and beneficial government. Some of these include steps to raise the income of government officials, restructure bureaucratic practices and to generally improve the quality and standards of public service.

Bureaucratic restructuring is essential to the practice of good, clean government, hence we are emphasizing and creating a greater awareness of the basic principles of accountability, transparency, personal and social responsibility, as well as law enforcement. However, to do that, the quality human resources of government officials, as well as the principles of citizen participation, will need to be further improved, through training and leading by example.

Given the wide range of constituencies within our borders, ranging from small traditional fishing villages, to modern industrial parks, tourism facilities, agricultural plantations, fishing and shipping operations and other industries this will not be easy. It is, however, a challenge that I embrace and will dedicate myself to resolving, over the coming years.

One development worth noting is the attention you have been devoting to help Batam establish a wide network of international relationships. For example, last year you traveled to New York and Washington and in July negotiated a memorandum of understanding to allow greater cooperation between Batam and the Aqaba Special Economic Zone in Jordan. Plans are also underway to visit Korea, Finland and other markets. Can you tell us more about these activities, how they will help Batam, and now that you are assuming the Governorship, how you might expand these initiatives to help the province as a whole?

Establishing good networks and relationships around the world constitutes one of the key elements of achieving success in a global economy. Batam, currently has received investments from over 34 different countries, and we have been moving to reach out to potential partners all over the world to enhance our competitiveness as a manufacturing and service platform. Under my governorship of Riau Islands Province, I plan to continue such practices though now on a provincial level, as I believe that our region offers abundant opportunities and we can now offer even stronger reasons to locate within our borders. With the support and helping hand of our overseas partners as well as foreign investors who have already established operations here, I have great confidence we can achieve great things and make the Riau Islands Province into an example for both Indonesia and the region as a whole.

Thank you very much Pak Ismeth for your time and attention. Before we conclude, do you have any final comments you would like to leave to our readers?

I would like again to thank the people of the Riau Islands Province, who have elected and entrusted me to become the first Governor of Indonesia’s newly-created 32nd province. I hope all the people living together in Riau Islands Province will join hands and work together for the progress of the region. I also hope international investors and business executives – many of whom have already become familiar with Batam – will recognize the increased possibilities available throughout the province. Finally, I invite all of your readers to visit the Riau Islands Province, so that they can see for themselves the opportunities that lie within our borders, as well as to enjoy Indonesian hospitality and a region, full of exciting tourism activities. Thank you.

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