Penalties too small for defiant developers

Controversy over building permits is back in the news these days with the building of the 40-storey Hotel Mulia in South Jakarta which allegedly deviated from its 16-floor permit. Panangian Simanungkalit, chairman of the Center for Indonesian Property Studies, talks about building licensing procedures.

Question: Despite the government's 1985/2005 spatial plan, violations by developers are rampant. A five-star hotel, Hotel Mulia, has allegedly built more stories than permitted...

Answer: Tata Ruang has become Tata Uang (the spatial plan has become a money plan) because laws are negotiable with political power and money. Laws sometimes lose power since they can be "purchased" with money.

Many buildings have been constructed even before their construction permits are issued. Why is this happening?

Since laws can be negotiated with political power and money, discrimination in law enforcement automatically occurs.

Q: Is there a penalty for such a violation?

A: Actually the developer has to pay a fine as a penalty for the violation. But the penalty is too small -- only about 8 percent of the difference in the residual land value of the building before and after the violation. In comparison, the fine is 50 percent in Singapore, a sum adequate for the government to build infrastructure needed to compensate for the impact of the violation. Because the fine in Indonesia is far too small compared to the advantages that the developer can obtain after the violation, such violations have now become a trend.

Q: Former Jakarta governor Surjadi Soedirdja once complained that he found it difficult to control the issuance of building permits to match the spatial plan. How many institutions are involved in the issuance of these permits?

A: There are too many institutions directly or indirectly involved, including the national land agency (BPN), the office of the State Minister for Public Housing, the Ministry of Finance and Bank Indonesia, besides the local administration. In reality, there is a difference in perceptions among these institutions and a mismatch of policies and their implementation in the field.

Bad attitudes among parties involved have also made it difficult for the governor to control the issuance of permits.

Q: Has the government made efforts to make cuts in the bureaucracy?

A: It has shown its willingness to do so. But where would it start? I think there must be some correction from the outside, like the International Monetary Fund (IMF), which has recommended a reform package to salvage the country from its monetary crisis. The property sector should also have been included in its reform package because bad loans for this sector were the main cause of the monetary crisis.

Q: Developers often complain about the too many permits they have to obtain and the excessive levies they have to pay. What permits do developers need to start their projects?

A: First of all, a developer must obtain recommendations from the BPN on the availability of a plot of land in a certain location before going to the local administration to process a location permit.

The developer then must obtain a number of other permits before he or she is allowed to acquire the land. The BPN then measures the land and checks whether it is a property under dispute before issuing a certificate for it.

The developer also must obtain permits for the design of the building, public facilities and all equipment related to the building, such as air-conditioners, power generators and electric equipment. An infrastructure permit is needed for the development of a housing complex.

The developer is then allowed to start constructing the building if a construction permit is issued. After the construction is completed, another permit for the building's utilization is needed.

Q: How long does it take for a developer to process those permits?

A: Because some of the permits can be processed simultaneously, a developer generally needs about nine months to obtain all the permits before starting construction. Another one month is needed for processing the building utilization permit after construction is completed.

Q: How much are the official rates set by the related offices for all those permits?

A: The official rates are only about 3 percent to 5 percent of the total costs of property projects.

Q: Do developers have to spend extra money for invisible costs when processing those permits?

A: Yes. The long bureaucratic procedures for processing the permits, land acquisition, construction and marketing are so attractive to related officials that some ask for parts of the "large gains" expected from the property business.

Such invisible costs generally raise the expenditures for processing the permits to 20 percent of the costs for establishing a housing complex and a range between 10 percent and 15 percent for other property projects.