Since 2019, Indonesia has embarked on a process to create the world’s largest green economic zones - can Indonesia become Asia’s first green industrial giant?

Many Asian countries rapidly grew their economies over the last 50 years - China, South Korea, Taiwan, Vietnam, and Malaysia all rapidly increased their wealth. This has had immeasurable benefits for the citizens of these countries, who now enjoy much higher living standards. However, this growth has come with serious consequences. China is now the world’s worst polluter, and the environment has taken a serious toll.

Indonesia plans to use economic zones to replace the economic growth enjoyed by its neighbors while simultaneously safeguarding the environment.

Special Economic Zones (SEZs) are business parks or cities that are exempted from many of the rules and regulations that normally apply to businesses. They often enjoy incentives such as tax breaks, relaxed labor laws, or the ability to grant business visas. There are roughly 7,500 SEZs located in more than 70 countries worldwide.

Indonesia has had some form of export processing zones which benefited from streamlined import/export procedures since the 1950s. In 2005, the country passed legislation to expand the tax incentives to also include VAT and corporate income taxes.

For decades, Indonesia has paid lip service to low-impact SEZ development. However, over the last five years, Indonesia has rapidly moved from rhetoric to large-scale implementation.

Since 1970, Indonesia has participated in a United Nations Industrial Development Organization (UNIDO) program to create Global Eco-Industrial Parks. At first, very little came from Indonesia’s collaborations with UNIDO. Then, in 1989, the government approved the creation of fully privately owned and operated business parks. The creation of green business parks became a national priority in the country’s 2005 National Long‐Term Development Plan. There are now 92 green business parks in Indonesia with UNIDO certification.

Then, in 2016, Indonesia would push the envelope far beyond what UNIDO envisioned.

The South Pole Group, a Swiss carbon finance consulting firm proposed the creation of a “Low Carbon Model Town.” The plan would turn Bitung City’s SEZ into the first of many low carbon SEZs. The zone itself would use renewable energy and carbon offsets to help businesses achieve significant emissions reductions. It would also consolidate the numerous regulatory agencies managing land use, immigration, and labor into a single efficient one-stop shop that would operate in the zone.

Although the South Pole Group’s plans for a Low Carbon Model Town never came to fruition, it would trigger a wave of interest that would result in the creation of dozens of other similar projects over the next few years.

The following year, the government organized a “Green Special Economic Zones Conference” where the National Council for Special Economic Zones and Ministry of Economic Affairs announced that building more environmentally friendly SEZs would be their number one priority.

There, the head of the National Council for Special Economic Zones explained that: “We are providing many incentives for investors to invest in our SEZs, such as tax holidays and non-fiscal incentives. By incorporating green growth in the development and policy of these zones, we are increasing the competitiveness and desirability of Indonesia’s SEZs to foreign investors.”

A representative of the Global Green Growth Institute, a think tank helping Indonesia create the policy guidelines for its new green SEZs, explained the importance of SEZs to achieving zero-waste: “A Special Economic Zone is a good place for the circular economy since clusters of companies can use the others' waste, so they can share resources.”

Within weeks, the government began investigating 25 possible sites for the creation of new “green SEZs.” Numerous infrastructure projects to improve the environmental competitiveness of SEZs were announced such as the retrofitting of government buildings, the creation of solar farms near the Mandalika tourism SEZ, and efficient public transportation systems.

By February 2019, the government announced a plan to create Premium Green SEZ Certificates. The certifications would allow companies located in the SEZ to take advantage of additional incentives if they voluntarily complied with environmental standards that went far beyond the legally required ones.

In October 2019, the government released the new SEZ rules which completely overhauled the nation’s SEZ legislation. Tax incentives were significantly simplified, and tax breaks were extended. Regulations restricting the employment of foreign workers were significantly reduced for companies in the zones, and the government announced its commitment to further reduce red tape preventing investors from operating in the country. Minimum capital requirements to take advantage of the incentives were also reduced, to make the program more appealing to small businesses.

Since the October 2019 SEZ reform, there has been an explosion in SEZ activity in Indonesia. Nearly all of the new projects claim to be “green” developments - although whether they actually comply with sustainable new standards remains to be seen.

Although the COVID-19 pandemic delayed many of Indonesia’s SEZ efforts, 2021 has seen an explosion in activity in the country’s new zones.

In June 2021, two new SEZs were approved in Batam City. The first is the Nongsa Digital Park, an old technology park which is being converted to become more environmentally sustainable and now has the ability to offer incentives to attract tenants in the tourism and R&D industries. The other zone is Batam Aero Technic, an aerospace zone owned by Lion Air Group, Indonesia’s largest discount airline.

Several weeks later, a pre-existing industrial park, the Java Integrated Industrial and Port Estate, was granted zone status. It then announced that it was seeking out $17 billion USD in foreign investments, which port officials believed would be feasible due to the new 2019 SEZ reform package.

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The new legislation has also been positively received by environmentalists. Officials from the Mandalika touristic zone believe that the new rules can help make the zone more eco-friendly. Zone officials explained that tourists visiting the zone produce 236 tons of trash per year, but until recently, the zone could not afford adequate waste management facilities. As part of the new legislation, the government is modernizing waste management in the zone,

Seeking to take advantage of the snowball in economic activity in the SEZs, the government announced in September 2021 that it would push its current SEZ legislation even further. The new system would digitize many of the government functions regulating businesses in SEZs, further reducing operating costs and red tape. The government also announced “Sustainable Finance” plans for environmentally friendly companies, although the details are still unclear.

Indonesia may be able to harness SEZs to offset the costs of becoming environmentally friendly, balancing sustainability and economic development. Sadly, many government commitments to reduce emissions turn out to be hot air, with politicians making insincere pledges to protect the environment.

While it may be too soon to see the results of Indonesia’s policies, its zones deserve cautious praise from the international community. Indonesia is definitely worth investigating as a possible location for investors looking for places where they can make their next green investments.