The promised land: Difficulties around land acquisition remain a significant challenge

Investors will risk capital on long-term projects only when they expect to capture adequate returns from their investments. However, they will only do that if they can forecast, with some certainty, the length of time it will take to complete such projects. Since 1993, the Indonesian government has promulgated various regulations on land acquisition hoping this will encourage investors to make long-term commitments to infrastructural projects.

Challenges

The reluctance to fast-track land acquisition has caused lengthy project delays and cost overruns. The difficulty of acquiring land in a reasonable period of time has tended to discourage investment in transport infrastructure such as roads, where land is a critical factor. Some of Indonesia’s laws are also not mutually supportive of one another. For example, the Land Expropriation Act No. 20 of 1961 (issued under the Basic Agrarian Act 1960) and Forestry Law 41 of 1999 have objectives that do not support each other. These laws are not well-defined and have often ended up causing disputes with the National Land Agency (Badan Pertanahan Nasional, BPN). A survey conducted by the Islamic Development Bank in 2009 found that investors considered the difficulty of acquiring land as the single largest constraint to infrastructure development in Indonesia. Other impediments included weak human and institutional capacity, poor quality of governance, and difficulties in finding adequate finance. Given Indonesia’s pressing needs and its vast geographical expanse, investors have often wondered why the acquisition of land has been so difficult. The answer lies in a combination of factors, from the desire of landowners to receive the highest price possible for their property to corruption and an absence of will on the part of the government to properly enforce legislation. Landowners often inflate prices of land needed for infrastructure projects. For instance, 65% of the land acquisition problems that have occurred since 1970 were related to conflict over compensation. Although Indonesia has legislation to address speculative activity, the law is not adequately enforced, and the government appears to lack the will to do so. The Land Acquisition Act, which was passed by the parliament in 2011, was supposed to make it easier for the government to acquire land for infrastructural projects. But in August 2012, a presidential decree exempted all infrastructural projects for which land was under negotiations outside the purview of the law until 2015, provoking much anxiety among investors. This effectively delayed the implementation of the law, and the entire episode brought to attention just how problematic the issue of land acquisition is in Indonesia.

Exposed To Risk

The responsibility for acquiring land for any public infrastructure rests with the government. For infrastructure projects undertaken as public-private partnerships (PPPs), regulation requires that, before the tendering process, the government will prepare, finance and execute the land acquisition plan. However, this has not yet been fully implemented in practice due to limited government budget allocations as well as the complexity of the acquisition process. Theoretically, a consensus is reached in advance about the schedule for land acquisition in the concession contract, with the government responsible for acquiring the land, and the private sector responsible for financing the acquisition. The agreed land cost is to be paid by the investors after the land has been cleared for construction. This is supposed to give investors confidence of completing the project within a reasonable time span. In reality, however, the government’s acquisition process takes much longer than anticipated, resulting in cost overruns and delays in implementation. The core issue is reaching agreement on a suitable price. The negotiations are conducted between the government and the landowners but often turn out to be lengthy and frustrating, involving diverse stakeholders, such as local government, landowners and non-governmental organisations. This exposes private investors to substantial risks during the project implementation stage.

Investors in toll road projects have been particularly vulnerable. As banks have been reluctant to lend money for land acquisition due to uncertainties surrounding the costs and acquisition period, toll road developers rely on equity to finance land purchases. This arrangement is especially risky for investors in urban toll road projects, where the cost of land can make up much as 50% of the total cost. Due to the slow land acquisition process, 20 of the 24 toll road projects for which concessions agreements have been signed are stalled or experiencing significant delays, some dating as far back as 1996.

It is therefore unsurprising that investors have been reluctant to participate in bids. In 2007, for instance, the Toll Road Regulatory Agency (Badan Pengatur Jalan Tol, BPJT) invited tenders for 13 toll road projects under its so-called “Batch II” package. However, it received just six bids. The tenders were subsequently cancelled due to lack of interest, and the agency had to consider restructuring the projects. Discussions with investors revealed that lack of interest was because the rights of way for the lands had not been acquired for any of the 13 toll roads tendered, and the proposed concession agreements were not seen as being bankable.

Even seasoned investors have been hurt by land acquisition problems. Citra Marga Nusaphala Persada (CMNP), Indonesia’s first private toll road operator, had initially budgeted Rp700bn ($70m) for the Depok-Antasari toll road. But by 2012 the cost of acquiring land rose to such an extent, reaching Rp1.8trn ($180m), that the financial viability of the entire project came into question, forcing CMNP to re-negotiate the concession agreement with BPJT.

Making It Easier

Presidential Regulation 65 of 2006 has limited the legal options available to property owners to challenge government attempts to acquire land for infrastructure projects. It also aimed at shortening the process and capping the cost of land. However, the government has remained wary of acquiring land through legal proceedings, preferring negotiations with landowners and establishing a revolving fund managed by the Ministry of Public Works and dedicated to acquiring land. In general this acquisition risk, which currently rests with the investor, should be addressed by the government prior to the investment decision, or be borne by the government. That said, if the government is able to speed up land acquisition it could boost the enthusiasm of investors for the transport infrastructure sector, and so take Indonesia one step closer towards realising the goals of the Master Plan for the Acceleration and Expansion of Economic Development, commonly known as MP3EI.

One key road project to benefit from speedy land acquisition would be the 653-km Trans-Java toll road. The project is part of the government’s plan to boost connectivity between the eastern and western parts of Java – the longest part is the 116-km Cikampek-Palimanan section – but has seen several sections stalled due to problems with acquiring land. It has affected the financial position of the Bakrie Group, one of the companies working on the project, forcing it to halt construction. Another key road project to benefit would be the 1000-km Trans-Sumatra toll road which is scheduled for completion in 2015.

Railway infrastructure projects are also expected to benefit significantly from swift land acquisition, due to their sizeable land requirements. Attracted by Indonesia’s plentiful coal reserves, the ongoing development of freight railways has successfully drawn substantial investment. However, the government’s attempts to convert this interest into realised investments suffered a setback in 2013 after India’s Adani Group pulled out of a $1.65bn railway project which would have connected the Bukit Asam mine in Tanjung Enim to the Sumatran port of Tanjung Apiapi – a distance of some 250 km. The deal collapsed after the Indian conglomerate balked at rising costs, mainly attributed to slow land acquisition and a ministerial decree that gave control of the railway line to the state-owned mining corporation Bukit Asam. Had it been completed, the railway would have been able to transport 35m tonnes of coal each year.

Forging Connection

Land acquisition could assist plans to build a 144-km high-speed railway line between Jakarta and Bandung. This is expected to cost Rp56.1trn ($5.61bn) and is reportedly being developed through the framework of a PPP, based on the model of Japan’s Shinkansen. It will have six stations, including one connecting to the planned Karawang International Airport in Jakarta. Although the effects of land acquisition are less likely to have an impact on the airport sector, it will still have a material impact on the project. This will be beneficial in attracting private investment as the government has shown itself to be willing to contract out airport operations and services to private companies.