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Property | Indonesia’s Land Acquisition Laws; On Paper Only?

President Joko Widodo core campaign pledges focused on the issues of corruption as well as pushing ahead with much needed and long delayed infrastructure projects across the archipelago. As Indonesia marks the one-year anniversary of the Widodo-Kalla administration in October 2015, the scorecard is decidedly mixed on the administration’s achievements in infrastructure development. Budget underspending continues to dog efforts to make headway and while sentiments are in the right place; execution remains a persistent stumbling block in realizing the government’s infrastructure push. Underpinning this challenge are Indonesia’s land acquisition laws which while on paper offer the legal grounding to acquire land in the public interest since 2012, the gap between what is on paper and how such measures are implemented remains vast.

Indonesia’s Land Acquisition Laws; On Paper Only?
Presidential Decree No. 30 of 2015 serves as an amendment to the previous 2012 law to facilitate private investment during the land acquisition process; a landmark change in how the process has normally been approached

Looking Back at 2012

The much anticipated Land Acquisition Act was passed into law in January 2012 by the Yudhoyono administration and was followed by Presidential Regulation No. 71 of 2012 on Land Procurement Process for the Public Interest which detailed the implementing regulations of the preceding law. These regulations focused on reducing the time period for completion of the land acquisition process for public infrastructure projects as well as processing appeals from landowners and a formalized framework for proof of land ownership.

Following on from the announcement of the 2012 Land Acquisition Act, expectations were high from investors that the measure would breathe new life into Indonesia’s creaky and overburdened infrastructure. However, this has failed to materialize as despite having the necessary authority to secure land in the public interest as determined in the Act, a distinct lack of leadership and coordination, murky legal uncertainty and conflicting interests between local and central government have not seen the rules enacted despite two subsequent revisions. As such, land acquisition for infrastructure projects in Indonesia has remained a burdensome, costly and opaque process.

The lack of progress on Indonesia’s infrastructure development is succinctly demonstrated by the sluggish pace of infrastructure spending since 2012 which remains below 4% of GDP and the progress of infrastructure projects such as toll roads which increased in length from 778 km in 2012 to 918 km in 2014 (World Bank) (See Indonesia’s Logistics Sector) As Susilo Bambang Yudhoyono left office after two terms as President of Indonesia at the end of 2014, observers applauded his achievements in maintaining political stability and for overseeing a commodity fueled economic boom, yet overshadowing his record is the distinct failure to kick-start infrastructure development as Indonesia’s economy enjoyed unprecedented growth.

And in 2015 …

Since taking office, President Joko Widodo has been fighting an uphill battle to get infrastructure projects finally moving ahead and to attract private investment into such projects. Fortifying the implementing regulations of the 2012, Land Acquisition Act in February 2015 illustrated the new administration’s commitment to clearing roadblocks and making the law workable (See Concrete Developments in Indonesia’s Infrastructure).

Presidential Decree No. 30 of 2015 serves as an amendment to the previous 2012 law to facilitate private investment during the land acquisition process; a landmark change in how the process has normally been approached. Previously, land acquisition financing had to be conducted through the regional or state budget such as by state owned enterprises which entailed a lengthy approval process. Under the new regulation, private actors can finance the procurement of land and be refunded from the state budget based on the calculated projected return on investment, thus opening up previously closed off financing channels. Further implementing regulations will be required to clarify the basis for such calculations to ensure that the funding model is actually able to be actionable given that this will be the basis for private investors’ participation. It is hoped that these measures will improve the attractiveness of infrastructure projects to the private sector and to encourage development through public private partnerships (PPPs) (See High Stakes for Indonesia’s New Infrastructure Push) which have to date failed to take off on a significant scale due to the uncertainties surrounding land acquisition.

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The new regulation also enable infrastructure projects at any stage in their development to make use of the Land Acquisition Act, even those that commenced prior to its introduction on the condition that 75% of the necessary land has already been acquired. Furthermore, greater transparency regarding compensation payments to land owners and the introduction of a strict timetable for the completion of the land acquisition process have been welcomed additions which should yield results in pushing forward progress as well as attracting investment.

Building Blocks

The general consensus among the business and investment community as the end of 2015 approaches is that infrastructure development is moving in the right direction under the Jokowi government. That being said, the real impact of the new land acquisition measures will not be seen until at least Q3 2016 or 2017 given that the process still takes 500 days to complete. Starting construction on these projects should also bring about the much needed multiplier effect to re-energize Indonesia’s slowing economic growth.

Investors should therefore remain vigilant in tracking the progress being made in watershed infrastructure projects which are among the first to implement the new laws and will stand as the litmus test of their workability off paper. These include the Palembang-Indralaya Toll Road which is part of the Trans Sumatra Toll Road Project. More telling given the complexities of acquiring land on the island of Java is the Pemalang-Batang-Semarang toll road, a long delayed 114 km section of the Trans-Java toll road for which the project as a whole had only acquired a total of 68.3% of the necessary land by October 2014 (Ministry of Public Works). The Soekarno-Hatta express railway link to Jakarta is a further project which will test the mettle of the new regulation (See Indonesia’s Railways; The Missing Link). Currently delayed due to redesigning, it has been announced that the project will be exclusively tendered to the private sector who will have to undertake the land acquisition without state involvement for the completion of the $1.8 billion USD project.

To guarantee the efficacy of the Indonesian government’s efforts in enforcing the amended regulations, homework remains to be done in creating an effective legal mechanism for terminating legitimate land rights as well as honoring compensation claims by rights holders. Tackling legal uncertainty is therefore a vital step in the enforcement of the regulation, to build the government’s capacity for execution and a necessary requirement for private investors to buy into Indonesia’s story of infrastructure backed growth.

Global Business Guide Indonesia - 2nd November 2015

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Indonesia Property Snapshot - Infrastructure

Average Government Spending: 2.9% of GDP (2015)
Investment Required: $500 billion USD (2015-19, RPJMN)
Global Infrastructure Ranking: 63/160 (WB 2016)
Infrastructure Quality Score: 2.65 (ASEAN Average 4)
Main Project Areas Under PPP: Toll roads & railways, power generation, water supply & waste management.
Government Bodies: BAPPENAS, BKPM, Ministry of Public Works and Housing, KPPIP.
Relevant Law: Law No. 2 of 2012 on Acquisition of Land for Development in the Public Interest, Presidential Regulation No. 38 of 2015 on Cooperation Between the Government and Business Entities in the Provision of Infrastructure, and Presidential Regulation No. 78 of 2010.