Wed, 04 Apr 2007
From: The Jakarta Post
By Ari Pitoyo, Head of Research
Last week, the government and House of Representatives finally approved the long-awaited new investment law, replacing the 1967 Foreign Investment Law and 1968 Domestic Investment Law.

One important change brought about by the new legislation involves extensions to the duration of land cultivation titles to 95 years from 35 previously, building rights to 80 years from 30 previously, and land-use titles to 75 years from 25 previously.

However, as reported in this newspaper, possession of these land titles does not constitute a blank check for domestic and foreign investors to exploit Indonesia's resources as they are only granted based on the fulfillment of strict requirements, namely, that the investment has a long gestation period, makes a major contribution to strengthening economic competitiveness, does not require large tracts of land and does not offend the public sense of justice.

Last week, I met a colleague working for a multilateral body in Indonesia. Our conversation touched upon issues regarding infrastructure investment, i.e., whether it will materialize and what the biggest impediments are.

He pointed out that rather than the frequently cited reluctance of the banks to fund investments, it was land problems that were the biggest impediments to investment.

You don't have to go far to see the severity of the land acquisition problem; just take a look at the Pramuka-A.Yani flyover in East Jakarta.

Although construction of the flyover has been completed, it has still not been opened as it is being blockaded by people claiming they have not been compensated for their land. Construction of the flyover was carried out by the central government (Ministry of Public Works), but land acquisition was the responsibility of the Jakarta administration.

This is only a flyover that does not require vast areas of land. But what if an expressway is involved? My colleague pointed to the already modest 12-13 percent internal rate of return on toll-road investments, excluding land acquisition. The attractiveness of toll-road developments becomes even lower if land acquisition delays are factored in.

Based on this and the impasse at Pramuka, certainty regarding project completion becomes of the utmost importance.

I am convinced that financing is not the key issue. Even if commercial lenders cannot justify extending loans due to poor returns, alternative financing with lower return requirements from intergovernmental and multinational agencies, such as the ADB and World Bank, is still available.

But who can guarantee that land acquisition will not turn out to be a problem? As in the case of the flyover cited above, why does the problem still persist even after construction has been completed? Several incidents suggest that speculators apply "hostage-negotiation" tactics to leverage the price. Again, law enforcement has an important role to play.

China plows about 9 percent of its GDP into public works, while the equivalent figure in India is 4 percent, and 7.5 percent in Indonesia. It is not only growth that can be accelerated through infrastructure spending; inflation can also be better controlled if there is adequate infrastructure in place.

A Bank Indonesia study concluded that Indonesian inflation is much more connected with supply bottlenecks than demand. Untangling supply bottlenecks would help control inflation even against a backdrop of strong economic growth.

So, how do we resolve the land acquisition problem? First, we have to regularize land ownership by requiring all land-ownership claims to be backed up by title documents. Priority should be given to those areas where it is planned to build infrastructural facilities.

This would also avoid the difficulties faced by Lapindo in compensating the victims of the Sidoarjo mud volcano due to their not having land title documents.

Second, and this has also been proposed by government, changes in land ownership in areas earmarked for infrastructural facilities should be prohibited.

This is a sensitive issue, and therefore has to be handled carefully through the appointing of an independent body to oversee the designation of areas earmarked for infrastructure schemes.

Thirdly, benchmarks for the assessing of compensation should be set, and trustees appointed to manage unclaimed payments. This has been done by the Jakarta local government in the case of a number of schemes, where the money was paid into court.

Based on our observations, less than ten projects, with an overall value of Rp 11.6 trillion, that were offered during the first Infrastructure Summit have progressed to the construction phase. The remainder are mostly stalled at the tender or prequalification stages.

The government offered a second package of infrastructure projects to potential investors during the second "infrastructure summit" (Nov. 1-3, 2006), consisting of 19 projects worth a total of Rp 500 trillion (US$55 billion), with project time lines of 3-4 years.

These include 12 tolled expressways (with a total length of 1,000 km), 3 water and sanitation facilities, 2 power plants, 1 gas pipeline, 1 rail line and 1 ferry terminal. However, none of the developments put on the table during the second summit have been built, or even progressed to the tender stage.

As a result, I sense frustration among top officials about the slow progress achieved in project implementation.

But, how can we move forward when insufficient attention is being paid to the land issue (which involves complex coordination between government agencies). It's all very well extending the duration of land titles, but whether they can actually be availed of is another matter.



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