Global Business Guide Indonesia

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Property | An Update on Indonesia’s Land Acquisition Law

Indonesia’s land acquisition laws have long been seen as the main hurdle to executing much needed infrastructure projects (See Land Acquisition Law). Transport and other civil infrastructure initiatives have been stalled as investors and construction companies have patiently awaited the announcement of the new regulations surrounding how land will be acquired for projects in the public interest. In December 2011, the House of Representatives finally approved the land acquisition bill entitled Law No.2/2012 ‘Acquisition of Land for Development in the Public Interest’ which concerns projects such as railways, ports, airports, roads, dams and tunnels. The passing of the law caused a surge of optimism in the Indonesian economy as rating agency Fitch raised Indonesia up to investment grade status coupled with positive gains for listed construction and toll road companies.

Indonesia’s Land Acquisition Law and Regulations
These new measures provide a great deal more certainty to investors by clearly stating that the government will provide the land for infrastructure initiatives.

As per Indonesia’s legal process, the passing of the House of Representatives bill must be followed by a Presidential Decree to clarify the implementation of the regulation with regards to compensation and the project categories that the new laws will apply to. The final draft of the decree was published in May 2012 and passed into law in August 2012 under the form of Presidential Decree No.71/2012. Further supporting regulations from other government ministries such as the Ministry of Finance are also required to bring the law into fruition with such ministries under obligation to issue regulations within three months from August 2012. While the Presidential Regulation is a very positive step in realising Indonesia’s much needed infrastructure projects, investors must understand the regulation within the context of Indonesia’s decentralised political structure and the potential pitfalls that lay ahead with regards to appeals due to challenges to the constitution that the law will inevitably bring up.

The Presidential Regulation has been met with expected controversy and polarised opinions as to whether it leans too favourably towards investors. In terms of the framework, the law itself applies only to government projects, however as per the Public Private Partnership scheme, private sector investors can be involved through partnering with state owned enterprises. It also sets a time limit of two years for final decisions of project locations with a possible extension of one year as well as 583 days for the land acquisition process to be completed. Such time limits are crucial in pushing forward projects and providing legal certainty for the process as weak regulation in the past under the previous regulations has caused land acquisition efforts to drag on. Regarding the application of the new regulations, it will not be applied retroactively and therefore can only be enforced for projects that have not yet begun their land acquisition activities. The previous regulations therefore still stand for projects that are already underway however such projects can apply the new regulations at the beginning of 2014 if required.

Land price speculation and compensation are also addressed in the Presidential Regulation but supporting legislation is still expected to clarify the particulars. Under the law, land that is required by state institutions can be acquired following consultation with rights holders which is subject to an appeal process directly to the Supreme Court with an obligation for legal disputes to be settled within 74 days. The land will be valued by an independent appraisal team and compensation for land owners will be based on the price of the land as well as perceived resulting losses from the giving up of their land which may also be subject to appeal.

These new measures provide a great deal more certainty to investors by clearly stating that the government will provide the land for infrastructure initiatives. This is therefore the first step in the Indonesian government’s plan to realise infrastructure projects worth $21 billion USD in 2013 which will lead to further private sector investment that link to state backed projects. Funds will be raised through the issuance of local and global bonds thus taking advantage of lower borrowing costs afforded to the country after regaining its investment grade status. President Susilo Bambang Yuudhoyono announced in a speech following the publication of the regulation that roads will be key area of focus for the government’s budget spending. Long awaited highway projects are therefore expected to progress swiftly over the course of 2013 such as the Trans–Sumatra, Trans–Java and Trans–Kalimantan highways. As a result, toll road operators including state owned Jasa Marga as well as supporting industries such as construction and cement companies will also reap benefits of the new legislation.

However, while investors are right to react positively to the development, challenges are expected to the law in relation to the 2001 Decision of the People’s Consultative Assembly (MPR) No. IX on Agrarian Reform and Management of Indonesia’s Natural Resources. This binding decision contains articles pertaining to government authority to take over land and being populist in nature, goes against the grain of the land acquisition law. The issue of legal ownership titles will also provide obstacles to procuring land as many Indonesians live on land that has been passed down through the generations and therefore not legally registered. The implementation of the Presidential Regulation only applies to land that is legally registered and with a recognised title therefore raising the issue of forced evictions of traditional settlers. Indonesia’s land registration and urban planning systems therefore require a radical as well as speedy overhaul to ensure that land procurement can be carried out while safeguarding the interests of traditional settlers in the process to avoid lengthy legal disputes that fall outside the jurisdiction of the Presidential Regulation. Should legal challenges ensue, investors may well demand guarantees from the government to protect them against changes in policy and legislation before infrastructure projects can get underway (See Public Private Partnerships).

Global Business Guide Indonesia - 2013

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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.