Policy Brief 2016/01 1

Rebuilding Indonesias
Industrial Estates
Joanna Octavia, M.Sc
Senior Researcher

Summary
The industrial estate business in Indonesia has been rapidly growing since its inception in
the 1970s, but poor planning and weak implementation of past policies have led to policy
problems in four key aspects: administration inefficiency, poor infrastructure, antagonistic
labor relations, and limited incentives. These problems were further compounded by issues
such as rising labor costs and soaring land prices in or around Greater Jakarta, where most
of the countrys most prominent industrial estates reside. This paper examines root causes
of industrial estate problems, the likely implications, the governments response, and
possible policy recommendations.

Introduction

In the development context, industrial estates there are now more than 12,000 industrial estates
have become synonymous with the process of that exist around the world, with an estimated 893
industrialization and are considered as powerful in ASEAN alone. According to the latest available
tools for employment generation, economic data from the Ministry of Industry in 2012, there
growth and competitiveness. Industrial estates, are 172 industrial estates currently scattered
in particular, have the ability to foster a catch-up across the Indonesian archipelago, most of which
strategy by providing an institutional framework, are dominated by manufacturing activities.1
modern services and infrastructure that is not
available in the rest of the country (UNIDO, 1997).
1
It is difficult to estimate the accurate numbers of
The challenge, however, is to create and maintain industrial estates in Indonesia due to the absence of a
industrial estates that are competitive not only in government body in charge of economic zones. UNIDO
the local market, but also in the global context. (2015) suggests that there are 260 industrial estates in
Research by UNIDO (2015) has suggested that Indonesia.
2 Policy Brief 2016/01

Chart 1. Breakdown of industrial estates in Indonesia, by island

Source: Ministry of Industry, 2012

The countrys industrial estate development Since current President Joko Jokowi Widodo
program began in the 1970s when the national took office in October 2014, much of the
government, in cooperation with the regional governments focus has been on revitalizing
governments, set up the countrys first industrial the economy by increasing investment in the
estate in Jakarta, which became Jakarta Industrial manufacturing sector. The development of
Estate Pulo Gadung (JIEP).2 This was subsequently industrial estates, along with special economic
followed by Surabaya Industrial Estate Rungkut zones (SEZs), is seen as one of the most effective
(SIER) (1974), Cilacap Industrial Estate (1974), ways to facilitate industrial activities and
Medan Industrial Estate (1975), Makassar accelerate the process of industrialization in the
Industrial Estate (1978), Cirebon Industrial Estate regions across the Indonesian archipelago. In
(1984), and Lampung Industrial Estate (1986) addition, investment in manufacturing activities,
(Kwanda, 2000). Due to limited budget allocated particularly in industries that are labor-intensive,
to the program, in 1989 the government issued a have the capacity to increase national and local
decree that opened the industrial estate business employment.
to the private sector.3 This was subsequently
followed by the issuance of series of regulations The revision to the Government Regulation No.
that formed the legal and technical basis of the 24/2009, along with the issuance of policies
industrial estate development in the country.4 targeted at easing investment inside industrial
estates, are part of an effort to boost the
competitiveness of Indonesias industrial estates.5
2
Regulation of the Ministry of Home Affairs No. 5/1974 While these efforts have improved the investment
stipulates that land for industrial estate business can only climate in the country, considerable work still
be granted to a legal entity whose entire capital comes needs to be done to evaluate and resolve ongoing
from the government. problems caused by ineffective policies.
3
The Presidential Decree No. 53/1989 opens the industrial
estate business to the private sector. 5
The new Government Regulation No. 142/2015 on
4
The Government Regulation No. 24/2009 on Industrial Industrial Estates was issued as an implementation to Law
Area was issued as an implementation to Law No. 5/1984 No. 3/2014 on Industry, and became effective on December
on Industry. 28th, 2015.
 Policy Brief 2016/01 3

This paper reviews policy problems and responses

related to industrial estate development,
particularly in the aspects of administration,
infrastructure, labor and incentives. It also
discusses cases of industrial estate development
in Thailand and Vietnam, as they are often viewed
as major competitors of Indonesia in the region,
particularly in attracting investment into the
manufacturing sector. Lastly, the paper also
offers several recommendations that could help
Indonesia further maximize its industrial estates
as tools for economic growth.

Policy Problems and Responses

Administration
The administration of industrial estates in a master development plan for industrialization
Indonesia is fragmented and not integrated was issued only for the Riau island of Batam.6 After
into the countrys overall industrial the 1989 decree that allowed the management
development strategy. of these estates by private companies, the
industrial estate business subsequently became
Two of the problems associated with the overwhelmingly dominated by the private sector.
administration of industrial estates are: (1) the Currently, only 6 percent of Indonesias industrial
lack of a coherent national strategy; and (2) estates are managed by the government, which
the lack of a dedicated government institution is in stark contrast to its regional counterparts:
assigned to develop, monitor and promote the Malaysia (78 percent) and Thailand (48 percent)
estates. (ADB, 2014).
The governments lack of involvement in the Moreover, Indonesia does not have a specific
countrys industrial estate development has government body responsible for the
led to soaring industrial land prices in more development of economic zones. This has
developed regions. led to unclear and inconsistent monitoring in
Compounding these problems is the process different institutions, such as the privately-
of administrative and fiscal decentralization run Industrial Estate Association of Indonesia
since 2001, which dispersed decision-making (Himpunan Kawasan Industri HKI), regional
authority to provincial and local-level governments, the Investment Coordinating Board
governments. (Badan Koordinasi Penanaman Modal BKPM)
and various teams under the Ministry of Industry.
The government has attempted to resolve these Other countries competing in industrial estate
administrative problems by: (1) redirecting development in the region, such as Thailand and
industrial investment into industrial estates; Vietnam, established bodies such the Industrial
and (2) strengthening its role in the countrys Estate Authority of Thailand (IEAT) and Vietnams
overall industrial estate development strategy. Department of Economic Zones at the Ministry of
Planning and Investment, respectively (UNIDO,
2015).
Prior to 2014, the development of industrial
estates across the Indonesian archipelago
lacked an overall master plan. While the
Government of Indonesia had issued various 6
Batam was designated as an industrial zone by the
regulations as the legal basis for industrial estates, Presidential Decree No. 71/1971.
4 Policy Brief 2016/01

Chart 2. Comparative view of population size, land mass size, and number of industrial estates

Source: Ministry of Industry, 2012

The private sectors domination of industrial estate development and insufficient government
involvement have resulted in soaring industrial land prices, which makes investing in Indonesias
industrial estates more expensive than in neighboring countries. To illustrate, in 2013 a square meter
in Bekasi or Karawang was priced at US$191, which was significantly higher than US$119 in Bangkok
(Siahaan, 2013). This may be attributed to a strong demand for industrial land in more developed
regions in or around Greater Jakarta, and low capacity utilization for industrial estate areas outside of
Java. Land prices can only be managed when governments play an active part and have a significant
share in their countries industrial estate development.

Chart 3. Comparison of industrial estate land prices in Indonesia (US$/m2)

Source: Industrial Estate Association of Indonesia, 2015

 Policy Brief 2016/01 5

In addition, the process of decentralization has Infrastructure

resulted in overlapping rules and regulations.
For example, Minister of Industry Regulation Indonesia is currently ranked in 5th place out
No. 5/2014 stipulates that nuisance permits are of 9 ASEAN countries in the Infrastructure
not necessary for businesses situated within sub-index on the World Banks The Logistics
industrial estates, while the Local Regulation of Performance Index and Its Indicators, below
the City of Batam No. 12/2009 and the Mayoral its main industrial estate competitors in the
Regulation of the City of Batam No. 13/2010 region: Thailand (3rd) and Vietnam (4th).
calls on businesses to obtain nuisance permits, Tenants inside several industrial estates in
regardless of their location. Another problem Indonesia have cited unreliable power supplies
highlighted by industrial estate managers was the and poor access to external infrastructure as
difficulty in acquiring land for industrial use, due the main infrastructure concerns.
to the overlaps of regulations between the two
levels of government. These inconsistencies and The new Government Regulation No. 142/2015
a lack of clarity in communicating the regulations, addresses the confusion surrounding
sometimes may incur unnecessary costs on infrastructure provision in the old regulation
businesses (Octavia, 2015).7 on industrial estate, by defining the different
types of industrial estate infrastructure and
In recent years, the government has increased assigning responsibility to specific institutions
its efforts to redirect investment into the for construction.
countrys industrial estates. A blueprint for
industrialization resembling a master plan for
industrial estate development was included in
In general, the quality of infrastructure in
the Law No. 3/2014 on Industry. The law, which
and around Indonesias industrial estates is
is also known as the new Industrial Bill, contains
inadequate. Unreliable power supplies and
provisions for a master plan for industrial
poor access to external infrastructure have been
development and encourages manufacturers to
cited by companies as two issues that need to
locate their factories within the available industrial
be addressed urgently by the government and
estates (ADB, 2014). Currently, the government
industrial estate managers.10 Electrical power is
aims to increase the proportion of industrial
especially critical for powering manufacturing
activities that are located inside industrial estates
operations, especially for industries that require
from 40 percent to 70 percent in the next twenty
energy-intensive facilities such as smelters. The
years (Yusuf, 2016).
unreliable power supply forced some businesses
The government will also strengthen its role in and industrial estate managers to provide their
the development of industrial estates. As a part own back-up electricity generators, which costs
of the National Development Plan 2015-2019, the three times the cost of electricity from PLN
government has announced plans to develop three (Papanek, Pardede, & Nazara, 2014). In addition,
locations out of the 13 planned industrial estates interviews with the business community also
outside of Java, while the remaining ten estates indicates that high traffic density inside ports
will be developed by the private sector (Salim, and airports and inadequate road networks have
2015).8 Increased government involvement will caused excessively high logistical costs.
also be seen through the creation of an industrial
The private provision of infrastructure by
estate committee (Komite Kawasan Industri), a
industrial estates has resulted in higher
government body that will be solely responsible
costs for tenants. Interviews with the private
for the growth, monitoring and promotion of the
sector suggest that this practice could increase
countrys industrial estates.9
investment costs by at least 20 to 30 percent.
7
Article 23(6) of the new Government Regulation No.
Adding to the problem of private provision
142/2015 on Industrial Area stipulates that a nuisance
permit is not necessary for companies located inside an 10
In February 2015, the Center for Public Policy
industrial estate. Transformation in collaboration with the Coordinating
8
The three locations are Palu in Central Sulawesi, Bitung in Ministry for Economic Affairs held a focus group
North Sulawesi and Kuala Tanjung in North Sumatera. discussion involving representatives from industrial
9
Article 4 of the new Government Regulation No. 142/2015 estate management, governmental institutions, business
on Industrial Area calls for the creation of an industrial associations and tenants of the industrial estates.
estate committee, whose membership and responsibilities Discussion was in reference to the Government Regulation
are outlined in detail in Articles 51 and 52. No. 24/2009 on Industrial Estate.
6 Policy Brief 2016/01

is that the law actually mandates that some

infrastructure services should be publicly owned.
For instance, the electric grid in Indonesia is a Labor
monopoly by the national electric company (PLN) The private sectors domination of the
(Papanek et al., 2014). This raises serious concerns countrys industrial estate development led to
when there is a discrepancy between the limited the proliferation of industrial estates in or near
quantity and quality of infrastructure provided Greater Jakarta. These regions are generally
by the government, and the capacity required by more affluent and have better infrastructure,
certain industries. but charge some of the highest minimum
Moreover, there is confusion over the role of the wage rates in the country.
government and industrial estate managers Frequent industrial actions often halt
in providing infrastructure. Focus group operations, undermining the security and
discussions between stakeholder representatives stability of several industrial estates in
reveals that the existing regulation on industrial Indonesia.
estate did not specify the details of what type of
infrastructure is associated with industrial estate The governments ambition to expand
development, and which institution is responsible industrial estate development to remote areas
for building it.11 may be hampered by a shortage of skilled
workers for more specialized industries.
Therefore, one of the key highlights of the new
regulation on industrial estates is clarity over To address the problems associated with labor
the division of responsibilities for building inside industrial estates, the government has
infrastructure.12 According to Government issued a new minimum wage policy effective
Regulation No. 142/2015, the provision of industrial January 2016, and committed to providing
infrastructure and supporting infrastructure is better social infrastructure for workers in
now placed under the authority of the Government accordance with Government Regulation No.
and/or the Local Government, whereas the 142/2015 on Industrial Estates.
responsibility to provide basic infrastructure
falls to industrial estate companies.13 However,
the companies have the flexibility to provide Privately-managed industrial estates prefer to
supporting infrastructure and supporting facilities operate in or around Greater Jakarta to gain
as they see fit.14 To accommodate the energy access to the capitals markets and superior
needs of some industries, the regulation also infrastructure, however this also incurs higher
allows industrial estate managers to construct labor costs compared to other regions. This is
and manage their own sources of electricity for due to the fact that minimum wages in Indonesia
personal and industrial use.15 vary across provinces, cities and districts, and
are generally higher in or around Greater Jakarta
than the rest of the country. For the year 2016, DKI
11
Article 5(3) of the old Government Regulation No. 24/2009
Jakarta recorded among the highest minimum
stipulates that the Minister (of Industry) will coordinate
with relevant institutions for the planning of the provision
wages (US$ 238), while the lowest can be found
of infrastructure and supporting facilities. It does not in the Banjarnegara district in Central Java (US$
specify what constitutes infrastructure and supporting 97). Bekasi, a district in the West Java province, is
facilities. home to at least thirteen industrial estates, one
12
In accordance with Article 62 of the Law No. 3/2014, of which is Jababeka Industrial Estate, the largest
which stipulates that the Government and the Local industrial estate in the whole Southeast Asia.16
Government guarantee the availability of the infrastructure Despite the relatively high minimum wage set
industry.
13
Industrial infrastructure includes energy and electricity 16
There are seven existing industrial estates in Cikarang:
networks; telecommunications networks; water resources Jababeka Industrial Park, Bekasi Fajar Industrial Estate,
and guaranteed raw water supply networks; sanitation; Delta Silicon (Lippo Cikarang), Greenland International
and transportation networks. Supporting infrastructure Industrial City (GIIC) Kota Delta Mas, MM2100 Industrial
includes housing; education and training; research and Town, East Jakarta Industrial Park (EJIP), and Bekasi
development; health; fire stations; and waste disposal. International Industrial Estate (BIIE). There are six existing
14
Basic infrastructure encompasses raw water treatment industrial estates in Karawang: Suryacipta Industrial
plant; wastewater treatment plant; drainage channel; Park, Karawang International Industrial City (KIIC), Kujang
installation of street lighting; and road networks. Industrial Estate, Mitra Karawang Industrial Estate, Artha
15
Article 42(1) Industrial Hill and Kota Bukit Indah.
 Policy Brief 2016/01 7

by the district government (US$ 246), industrial The government has made a conscious effort to
estates in Bekasi still enjoy great popularity protect the stability of labor relations within
among foreign investors particularly due to their industrial estates by issuing a new minimum
proximity to Jakarta, ample supply of skilled wage policy and investing in plans to increase
labor, and easy access to Indonesias busiest port, workers skills and productivity. A key item in the
Tanjung Priok. fourth economic policy package issued towards the
end of 2015 was a fixed formula for setting regional
Frequent industrial action has played a role in minimum wages starting in 2016, which takes into
discouraging investment in the manufacturing account both the regions inflation rate and the
sector. In 2012 and 2013, several large-scale rate of economic growth. It was hoped that this
strikes and rallies demanding higher wages and could address the contentious wage negotiations
severance pay have disrupted production within between workers and employers (Burhanudin &
several industrial estates, causing some investors Octavia, 2015). Moreover, to address the problem
to consider moving to other manufacturing hubs of unskilled workers for specific industries, the
in the region.17 Minimum wage hikes for 2013 new regulation on industrial estates stipulates
reached 40 percent in some parts of the country, that educational and training facilities, as well as
which made running labor-intensive industries research and development centers, are among
more expensive (Vaswani, 2013). the minimum required supporting infrastructure
In reality, labor demonstrations at several that the government should be providing.19
industrial estates are considered to be against
the law. Decree No. 466/M-IND/Kep/8/2014
specified that 49 companies and 14 industrial
estates are assigned as Indonesias National
Vital Object (Objek Vital Nasional). National Vital
Objects are companies or industrial estates with
strategic importance that are granted special
protection from the police.18 However, continued
demonstrations at some of the national vital
objects show that the enforcement of these
regulations remained weak.
Another labor market problem related to the
governments ambition to expand industrial
estate development outside of Java is a
shortage of skilled workers for more specialized
industries in remote areas. Given their proximity Incentives
to raw materials, industrial estates in more
remote areas generally focus on more specialized, Fiscal and non-fiscal incentives are often
resource-based industries. The newly-established considered as additional inducements that
Indonesia Morowali Industrial Park in Central are used by governments to attract firms to
Sulawesi, for instance, focuses on ferronickel industrial estates.
smelter and stainless steel manufacturing Government Regulation No. 142/2015
industries, while the Teluk Bintuni Industrial offers generous incentives for prospective
Park in the far-flung province of West Papua and existing tenants in industrial estates.
manufactures fertilizer and petroleum. However, Incentives will be offered based on the zoning
these industries generally require workers with system that divides the countrys industrial
more specific skills that are beyond the quality of estates into four categories, with greater
labor available in the region. incentives available in less-developed regions.
17
According to interviews with executives at Batamindo
Industrial Park, notoriously frequent labor strikes and
rallies have caused disturbances to businesses, and led
some manufacturers to move their operations elsewhere. 19
Article 10(3) of the new Government Regulation No.
18
Article (2) of the Law No. 9/1998 prohibits protests at 142/2015 requires the government and/or regional
National Vital Objects, and Presidential Decree No. 63/2004 government to provide supporting facilities that include
allows the deployment of police forces to ensure the (b) educational and training facilities and (c) research and
security of these Objects. development centers.
8 Policy Brief 2016/01

In the past, there was no obvious benefit for appointed by the BKPM after receiving their basic
companies whether they opt to locate inside licenses (Manuturi, 2016).20
or outside an industrial estate in Indonesia.
However, some of the factors that investors Government Regulation No. 142/2015 also
consider are the types and value of incentives offers additional incentives to make the
compared to its counterparts in the region. Some countrys industrial estates more attractive to
of these incentives are fiscal in nature, such as investors. Some of these incentives include tax
tax holidays; the rest, like the simplification holidays and allowances, along with reductions
of procedures and one-window service for or exemptions from regional taxes, which will be
administrative matters, are considered non- provided based on the zoning system that divides
fiscal facilities. However, the old Government industrial estates into four categories. Greater
Regulation No. 24/2009 on Industrial Estates did incentives will be granted for businesses that opt
not include provisions on incentives or facilities to to locate in less developed zones.21 To simplify
attract companies to locate inside the countrys licensing procedures, the regulation also allows
industrial estates. Prior to the issuance of the tenants to skip filing the environmental impact
new regulation at the end of December 2015, only analysis (AMDAL) if the industrial estate manager
industrial estates located inside the countrys has already done so.22
SEZs were able to enjoy some fiscal incentives.
Today, industrial estates in Indonesia are 20
The estates included in this initiative are: Kendal
gaining popularity after the government Industrial Estate, Bukit Semarang Industrial Estate,
had started to issue regulations that ease Tugu Wijaya Kusuma Industrial Estate, Candi Industrial
investment inside the assigned areas. The Estate, Wilmar Integrated Industrial Estate, Modern
Cikande Industrial Estate, Krakatau Industrial Estate, Java
availability of a three-hour licensing policy for
Integrated Industrial and Port Estate (JIIPE) and Bantaeng
investors with projects that are worth at least Rp Industrial Estate.
100 billion (US$7.3 million), employ a minimum of 21
The four categories are: developed industrial
1,000 employees and are located inside industrial development estates (WPI) in Java; developing WPI in
estates designated by the BKPM, have resulted southern Sulawesi, eastern Kalimantan, northern Sumatera
in an investment commitment reaching Rp 52.9 (other than Batam, Bintan and Karimun) and southern
trillion, and employment absorption of almost Sumatera; potential WPI in northern Sulawesi, western
16,000 Indonesian workers (Amindoni, 2016). This Kalimantan, Bali and Nusa Tenggara; and potential WPI in
policy had since been expanded to allow investors Papua and West Papua.
to begin construction in nine industrial estates 22
Part Three: Obligations of Industrial Enterprises in the
Industrial Area, Article 38 (4).
 Policy Brief 2016/01 9

Table 1. Key changes in the Government Regulation on Industrial Estate

Government Regulation No. 24/2009 Government Regulation No. 142/2015

1. The governments role in the countrys The governments role in industrial estate development
industrial estate development was has been expanded to include (but are not limited to):
limited.
Providing industrial estate infrastructure
Establishing industrial estate standards
Providing incentives and other facilities according to
the regulation as determined by the Law. (Chapter II,
Articles 4 and 5)

2. The definition for industrial estate The new regulation clearly defines the difference
infrastructure was unclear. There was between industrial infrastructure, supporting
confusion over which institution was infrastructure, and basic infrastructure; as well as who
responsible for providing each of these is responsible for providing each type of infrastructure.
facilities. (Chapter III, Articles 10 and 11)

3. Licensing procedures for companies Industrial estate tenants are not required to obtain a
located inside industrial estates were nuisance (HO) permit. (Chapter IV, Article 23(6))
neither simplified nor subjected to special
treatment or one-stop service (OSS). Industrial estate managers are required to facilitate
licensing OSS for companies inside the estates. (Chapter
VII, Article 35(3))
The new regulation allows tenants to skip filing the
environmental impact analysis (AMDAL) if the industrial
estate manager has already done so. (Chapter VII,
Article 38(3))
Industrial estates are allowed to construct and manage
their own sources of electricity for personal and
industrial use. (Chapter VIII, Article 42)

4. The old regulation did not offer any type The government is offering tax incentives to attract
of incentive for companies locating inside businesses to invest inside industrial estates. The
the countrys industrial estates. provision of incentives is based on a zoning system,
whereby greater incentives are provided for businesses
that will locate in less developed zones. (Chapter VIII,
Article 41)
10 Policy Brief 2016/01

Case Studies Vietnam

Thailand

Industrial estates in Vietnam are well-organized,

and along with Export Processing Zones and
Special Economic Zones, are considered a part of
the 2020 national development project outlined
Industrial estate development in Thailand has been in the Decision No. 1107/DQ-TTG dated August
recognized globally primarily for its high quality, 21st 2006 (Phi, 2011). The estates are some of the
state-of-art infrastructure. Thailand is ranked 3rd main recipients of the countrys foreign direct
in ASEAN after Singapore and Malaysia, and 31st investment (FDI), a majority of which went into
in the world out of the 160 countries surveyed for the manufacturing sector. Manufacturing makes
the World Banks The Logistics Performance Index up most of the activities inside the countrys
and Its Indicators in 2014. Most of the countrys industrial estates.
industrial estates are located in areas that are
accessible to airports and seaports, which is Vietnams relative advantage in the manufacturing
especially vital for export-oriented industries. sector is its low labor costs and high quality of
Connectivity is further supported by an extensive, work. Vietnam offers cost advantages in labor-
paved road transportation network that exceeds intensive industries such as garments, with
390,000 kilometers. About 65,000 kilometers of monthly minimum wage that is among the lowest
this network forms a national highway system in the region (US$ 110), lower than Indonesia
that connects all 76 provinces, thereby allowing (US$ 205) (Papanek et al., 2014). This has allowed
free freight movement across the country. Vietnam to successfully capture the labor-
intensive investment flowing out of China as the
Another oft-cited strength of Thailands industrial latter moves up the global value chain and loses
estate development is its administrative efficiency. its competitive edge as a low-cost manufacturing
Established in 1972, the Industrial Estate Authority base.
of Thailand (IEAT) is a state enterprise attached to
the Ministry of Industry tasked with implementing Vietnam is also home to a well-educated and
the governments industrial development policy. young labor force that benefited from excellent
This includes the development and management educational and training programs targeted
of the countrys industrial estates. Among its at upgrading workers skills and increasing
many achievements, the IEAT has succeeded labor productivity. For example, the 10-year
in creating an industrial cluster concept which vocational and technical education (VTE) project
divides the countrys industrial estates based on by the Asian Development Bank (ADB) was able
the types of industries. The strategy has spread to successfully train a total of 108,000 skilled
development equally away from Bangkok to the workers and production technicians by 2008.
outlying provinces. The competitiveness of Vietnams workers was
further corroborated by a multinational furniture
manufacturer with production facilities in Vietnam
and Indonesia, who noted that Vietnamese
workers are generally more disciplined, and have
better quality of work and work ethic.23

23
Interviews were conducted for the development of a case
study on business licensing published by Transformasi in
October 2015.
 Policy Brief 2016/01 11

Conclusion and Recommendations

Though industrial estates have existed in planned industrial estates outside of Java.
Indonesia since the 1970s, they have not been Papanek et al. (2014) proposed that private
fully utilized as a tool for economic growth companies can build infrastructure as a way to
through industrialization. Industrial estates have discharge their tax obligations, given that the
been an ongoing development agenda for the government has limited funding and capacity
Indonesian government, but prior to the current to build infrastructure in areas far from Jakarta.
administration they were merely a small, and often Involving the private sector will be beneficial
disengaged, component of the countrys overall for all parties as it has the potential to expedite
economic strategy. Various problems, ranging the process of infrastructure development.
from the lack of a coherent plan; inadequate However, strict quality control will need to be
provision of infrastructure; antagonistic labor put in place to ensure that these projects meet
relations; and limited incentives, have further a certain level of standard, and are free from
complicated the situation. bribery and collusion between contractors
and the government.
The revisions to the regulation on industrial
estates and a series of policy packages targeted 3. Negotiated agreements on selected industrial
at increasing investment in those estates have estates that exchange lower minimum wages
been well-received by the business community. for subsidized or free housing, childrens
In particular, there were several pivotal changes education and healthcare. This may give
introduced in Government Regulation No. companies, particularly those that are
142/2015 that were not present in the old concerned about rising labor costs, a powerful
regulations, including required facilities and incentive to relocate to these estates.
standards of industrial estates, the governments
role in initiating industrial estate development, 4. Better coordination between governments at
and the creation of industrial estate committees. the national and local levels to facilitate the
As of the time of writing, the business community is regulation of industrial land prices and land
waiting for the issuance of a ministerial regulation acquisition reforms.
(Peraturan Menteri Perindustrian Permenperin)
which will provide the technical details on the
revised government regulation. Industrial estates have the potential to spread
equal development across the archipelago if
Moving forward, there are several they are properly and holistically developed.
recommendations that the Government of However, the challenges faced by the Indonesian
Indonesia could consider to further improve the government are much more complex compared
countrys industrial estates: to other countries in the region. Aside from
1. The immediate creation of an Industrial Estate addressing problems caused by past policies, and
Authority of Indonesia.24 Having a single body building on that foundation, Indonesia also has
responsible for industrial estate development to remember that it does not exist in a vacuum.
will prevent the overlapping of implementation Decades of trade and investment liberalization
and monitoring roles between institutions. in other countries mean that investors have the
luxury of choosing the most favorable conditions
2. The acceleration of infrastructure develop- for their businesses, leaving Indonesian industrial
ment to address the inadequate provision estates to face fierce competition in attracting
of infrastructure, particularly for the 13 investment.
24
Article 5 of the Government Regulation No. 142/2015
12 Policy Brief 2016/01

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 Policy Brief 2016/01 13

Acknowledgements

This policy brief was prepared by Ms. Joanna Octavia,

Senior Researcher at the Center for Public Policy
Transformation (Transformasi), under the guidance
and direction of Dr. Jonathan Pincus, Senior Advisor at
Transformasi and Dr. Gustav Papanek, Senior Advisor at
Transformasi.
The research and writing processes of this paper would
not have been possible without the help of Mr. Edy Putra
Irawady, Deputy Minister for Industry and Trade at the
Coordinating Ministry for Economic Affairs of the Republic
of Indonesia; Mr. Fahmi Shahab, Executive Director of
the Industrial Estate Association of Indonesia; Mr. Edwin
Gusdirzal, Staff of the Industrial Estate Association of
Indonesia; Mr. Tjaw Hioeng, Administrative and General
Affairs Manager of PT Batamindo Investment Cakrawala;
and the National Team for Industrial Estates (Timnas-KI)
under the Ministry of Industry of the Republic of Indonesia.
This policy brief has also benefited from the design of
Andryanto Suswardoyo, Visual Branding Specialist; and the
translation and language editing by Wicaksono Prayogie,
Translator at Transformasi.
14 Policy Brief 2016/01

Supported by:

Transformasi Center for Public Policy Transformation

Workshop: Jl. Cipaku V No. 24, Petogogan, Kebayoran Baru, Jakarta 12170, Indonesia
Office: Perkantoran Fatmawati Mas Blok I/118, Jl. Fatmawati Raya No. 20, Jakarta 12430, Indonesia