Luky Eko Wuryanto

Deputy Chairman for Investment Planning atINDONESIA INVESTMENT COORDINATING BOARD

February 22th 2008

BKPMBKPM

TOPICS

OverviewThe ImportanceMain Features of SEZ PolicyWay Forward

• Macro economic stability• Improved economic performance• Improved domestic situation• Huge deposits of natural resource endowments• Strong government commitment to protect foreign

investment• Continued government commitment to combat corruption

(anti corruption team has recovered US$43.5 billion)

MACROECONOMICS BRIEF

2007GDP Growth 3rd Quarter 6.5%

Reserves US$ 56.9 billion

Interest rate 8.0 %

Inflation 6.59%

Investment Realization (BKPM “Sectors”)

US$ 14.21 billion (up 71.69%)

TARGETS FOR 2008 - 2009

– Unemployment 9,1 % (2007) 8 - 9 % (2008)– Poverty 16,6 % (2007) 14,2 - 16 % (2008)

– Economic Growth: 6,0 % (corrected from 6.4%, due to intern. oil price hike) and 2009 estimation ranges from 6.6 – 6.8 %

• Investment required : US$ 144.0 billion (max. 13% of GDP)

• Govt Contribution : US$ 16.4 billion• Private Contribution : US$ 127.5 billion

Investment on Infrastructure : US$ 6.7 billion (includingprivate contribution)

No.No. COUNTRYCOUNTRY VALUE OF VALUE OF INVESTMENTINVESTMENT

NUMBER OF NUMBER OF PROJECTPROJECT

11 UUNITED STATES OF AMERICANITED STATES OF AMERICA US$. 13US$. 13,,31318.98.9 MMillionillion 3388

22 SSINGAPOREINGAPORE US$. 5US$. 5,571.4,571.4 MMillionillion 308308

33 MMALAYSIAALAYSIA US$. 2US$. 2,,3350.650.6 MMillionillion 202202

44 SSEYCHELEYCHELLESLES US$. 1US$. 1,,60601.41.4 MMillionillion 99

55 UUNITED KINGDOMNITED KINGDOM US$. US$. 1,034.61,034.6 MMillionillion 111212

FDI COMMITMENT (APPROVAL) BY COUNTRY - 2007

Source: BKPM monthly report, jan’08

NO.NO. COUNTRYCOUNTRY VALUE OF VALUE OF INVESTMENTINVESTMENT

NUMBER OF NUMBER OF PROJECTPROJECT

11 SINGAPSINGAPOREORE (US$. 3.73 billion)(US$. 3.73 billion) 121244

22 UNITED KINGDOMUNITED KINGDOM (US$. 1.68 billion)(US$. 1.68 billion) 6633

33 SOUTH KOREASOUTH KOREA (US$. 0.62 billion)(US$. 0.62 billion) 161644

44 JAPANJAPAN (US$. 0.6(US$. 0.611 billion)billion) 111133

55 TAIWANTAIWAN (US$. 0.47 billion)(US$. 0.47 billion) 3333

RANK OF FDI REALIZATION BY COUNTRY( 2007 )

Source: BKPM monthly report, jan’08

Size of a country (in terms of population) does matter. Big size country with abundant resources and friendly political climate is considered ideal …

Importance of Importance of criteria by regioncriteria by region

Features of Investment LawApply to any investments in any sectors including MininG, Energy and Financial sectors (multi-sectors direct investment coverage) Providing equal treatmentProtection from nationalization or taking over the ownership right (legal guarantee)Providing fiscal incentives for various business sectorsRight to transfer, repatriate investment and profitFacilitation in employ foreign workers (non-fiscal incentive)Service and/or licensing convenience through One-Stop Integrated Service(investment services)In the event of any dispute in investment sector, it can be solved throughdeliberation, arbitration or alternative settlement or court of justice (dispute settlement)No minimum capital investment requirementDevelopment of Special Economic Zones (SEZ’s) with internationally competitive investment incentives (both on fiscal and non fiscal)

The substantial role of various “exporting zones” (Bonded Zones and Bonded Warehouse) as the main centers for economic/manufacturing activities in their surrounding areas.• Batam: in its prime era generating more than 15% of national

export earnings from non-oil and gas sectors• Jabotabek: generating even bigger contributions (20-25%) of

national export earnings from non-oil and gas sectorsLearning from the “failure” of Potential Areas development (Kawasan Andalan’s) in the national spatial planning (from 1997) and Integrated Economic Dev’t Areas (KAPET’s).Fiercely intense competition in attracting FDI’s in the East and the South-East Asia region. The absence of comprehensive area development policy for efficiently and effectively generating FDI’s as well as diversifying economic activities

Main Objectives

Spread and diversified economic activities.Create a rather complete activities for an efficient value-added chain process within one integrated location.Internationally competitive locations with rigorous investivesin fiscal and non-fiscal.Piloting ground for export as well as investment policy breakthrough (pro-business, accountable and transparent).

Free Zone/EPZ/FTZSmall areas, enclave operationsEligible activities restrictedDuty free important restrictedExport requirement, restricted sales to national marketRestricted labor regimeNo residentsLimited deregulationAuthority has limited powersWTO compliance issues

From FTZ SEZ

SEZ/FreeportLarge area-locational flexibility, internal marketAll activities eligibleFull duty-free importsNo export requirement; full sales to national marketLiberal labor regimeResident populationDeregulated utilitiesOne-stop authorityWTO consistent

Various zones in SEZ (zones within zone)

• Export processing zones (EPZs): assembly and logistics, 100% exports

• Bonded zones (BZs): processing, warehousing, logistics, for domestic markets or exports.

• Industrial zones: processing/manufacturing, for domestic markets

• Technoparks: product development, hi-tech industries, research institutes

• Other economic zones: resorts, medical centers, etc.• Supporting activities: housings, integrated service cen-

ters, shopping centers, ports, etc.

In Simplified Diagramatic

BZ

EPZ

Industrial Zone

BZ

Technopark

Housings

Housings

Recreational

Port

criteria

• Commitment from provincial/district government to manage the proposed SEZ

• Consistent with provincial spatial planning, not in the conservation areas

• Located in a strategic position, close to international trade route, international maritime route in Indonesia, and/or supported by leading sector with comparative advantages.

• Supported by a relatively developed (outer) infrastructures which has elibility to be developed further

• Apparent/noticeable boundaries (natural and man-made)

Institutional Setup

• National Council (Chaired by Coord. Ministry for Economic Affairs) main task to setup national strategic policy and strategy, SOPs, synchronization, Monev, and assisting regional government– National Secretariate Headed by Chairman of BKPM

• Regional Council (Chaired by Governor, legalized by Presidential Decree)

• Managing Company (Headed by Professional, responsible to Governor as a chairman for regional council)

Fiscal:Fiscal:Reduced income tax or tax exemption for pioneer industriesReduced income tax or tax exemption for pioneer industriesImport duties exemption or reduction for machinery & equipment (Import duties exemption or reduction for machinery & equipment (including for including for replacement)replacement)Import duties exemption or reduction for raw materials and suppoImport duties exemption or reduction for raw materials and supporting materials for rting materials for the first two yearthe first two yearFree value added tax for goods inFree value added tax for goods in--flow from outside SEZflow from outside SEZAccelerated depreciationAccelerated depreciationProperty tax deductibleProperty tax deductibleLoss compensation and carryLoss compensation and carry--forward loss up for 5forward loss up for 5--10 years10 yearsReduction of local and regional tax and retributionsReduction of local and regional tax and retributions

NonNon--fiscal:fiscal:Facilities consistent to Investment Law on land tenureFacilities consistent to Investment Law on land tenureIntegrated and simplified investment procedureIntegrated and simplified investment procedureWorldWorld--class infrastructures (energy, transportation, telecommunicationclass infrastructures (energy, transportation, telecommunication etc.)etc.)Investment negative list is not applicable, except for the complInvestment negative list is not applicable, except for the completely closed activities etely closed activities and and SMESME’’ssMore flexible labor regulationsMore flexible labor regulationsMuch more secure and safe neighborhoodMuch more secure and safe neighborhood

General Incentives

The draft law plan to be submitted to the parliament the end of July 2008, to be promulgated in the 4th quarter of 2008.The (draft) law instructs to formulate the implementing re-gulation (in form of gov’t regulation/PP) to detail the various incentives for each type of area development within SEZ, procedure to delegate related authorities from central and regional government, and institutional framework setup from national to regional government. Those works is planned to be finished up also in 2008.Evaluating the proposals from regional government to then to be decided, which of those areas will be chosen as the first batch development of SEZ’s.Monitor and assist (if needed) to regional government to achieve what has been stated in the law that the approved SEZ must be operational within 3 years after the decision.

IDENTIFIED PROPOSED SEZs BY PROVINCIAL GOVERNMENT

AREAAREA

1. Industrial zone in Kota Dumai

2. Industrial zone in Kota Medan

3. Industrial zone Kwala Tanjung Kab. Deli Serdang

4. Industrial zone Kota Batam

5. Industrial zone Lobam Kabupaten Bintan

6. Industrial zone & Pertanian Kabupaten Karimun

7. Tanjung Api – Api

8. Kedungsemar (Kendal, Demak , Ungaran, Semarang)

9. Banglor (Rembang, Blora)

10.Bojonegara

11.Metropolitan Mamminasata (Makassar, Maros, Sangguminasa, Takalar), Sulawesi Selatan

12.Industrial zone in Cikarang – Bekasi

13.Industrial zone for jewelry (border of Sidoarjo and Surabaya)

14.Industrial zone for shipyard in Lamongan

15.Industrial zone in Semparuk

16.Paloh-Sajingan

17.Border Development Center at Entikong

18.Integrated area at Temajo

19.Mempawah

20.Industrial zone in Palu

1. Riau

2. Sumatera Utara

3. Kepulauan Riau

4. Sumatera Selatan

5. Jawa Tengah

6. Banten

7. Sulawesi Selatan

8. Jawa Barat

9. Jawa Timur

10.Kalimantan Barat

11.Sulawesi Tengah

PROVINCEPROVINCE