Indonesia
Land value capture in Indonesia
Land value capture instruments are little used in Indonesia (Table 2.27). The four levels of government make some use of land readjustment and strategic land management to provide land for urban development. Charges for development rights can be levied when there is a request by developers to build at higher density or to benefit from land use changes. Yet, implementation is scarce, since local ordinances and regulations are largely absent. Although infrastructure levies are not regulated by law, it is common to collect contributions from landowners for the improvement of public facilities, especially in rural areas.
Enabling framework
Indonesia is a unitary state with a three-tier system of subnational government: 34 provinces at the regional level, 416 regencies and 98 cities at the intermediate level, and 83 344 villages at the local level. The provinces represent the central government within their territories, carrying out some of its tasks. Regencies and cities are at the same level, having each their own elected government. Villages are recognized as self-governing entities since 2014, enjoying autonomy and own resources.
The principle of social function of property establishes that land shall be used to the greatest benefit of the people, that is, to the common good according to the Constitution. All rights on land have a social function, and excessive ownership and control of land that could harm the public interest are not permitted (National Law 5/1960).
The implementation of land value capture Instruments varies widely across urban areas. The Java-Bali region and selected metropolitan areas in Sumatera, Kalimantan, and Sulawesi islands have the most dynamic land development and therefore make more substantial use of land value capture. Outside the 14 metropolitan areas, municipalities often do not have the local ordinances and the sufficient administrative capacity to implement these instruments.
Land readjustment
Land readjustment is used for the purposes of urban expansion, farmland consolidation and post-disaster reconstruction. The national government, local governments and private landowners make moderate use of this instrument. Local governments need approval from the national government to do so, via the Ministry of Land and Spatial Planning.
Land readjustment projects are conducted after a consultation process with landowners and tenants. When 60% of landowners give their consent, which happens only in some cases, they transfer their plots. The land contributions of resisting landowners are enforced through expropriations at market rates based on the original use of plots.
A share of at least 15% of the readjusted plots is reserved for public improvements, such public roads and parking space, from which landowners will benefit. After readjustment, landowners receive a plot with a surface area proportional to their original holdings. If they prefer, they can exchange the reallocated plots for cash compensation.
The implementation of land readjustment is challenged by the low levels of administrative capacities and the lack of resettlement alternatives for displaced tenants and informal residents. Since landowners do not always give their consent, public entities need to resort to land expropriations, which are expensive and controversial.
Strategic land management
Strategic land management is used by national government, provinces, districts and municipalities, as well as public corporations and independent public agencies, to control urban growth and promote planned urban development. The State Asset Management Agency (LMAN) is the sole government agency responsible for managing land and property assets. As a whole, the country makes moderate use of strategic land management.
The government may acquire land in a number of ways: through purchases at market prices; via transfers between government agencies; or via expropriation, under which market-value compensations must be given. Commonly, the government retains forcibly taken land or unproductive property assets.
The government can freeze land prices at a certain level before the announcement of a public investment or rezoning and buy the land at that price. The government can also retain land before selling it, in expectation of future increases in land prices. Land is typically retained for 3 years. However, this is less common, as the government normally buys land for a specific purpose, such as to build new public infrastructure.
Acquired land is rezoned and developed by the government, which raises land prices. Development includes basic physical preparation, new roads and construction of residential and commercial units. Afterwards, the government may auction developed plots to private actors or transfer them to another public entity. The government recovers investments through the sale or leasing of the developed plots.
Public land may be leased to generate public revenues and to provide land for real estate development, facilitating development in alignment with spatial planning objectives. The ground rent is calculated as 3.33% of the land value, with no exemptions or discounts.
Lease length varies according to the purposes for which the land or property is leased. If destined for commercial use, the lease can be of 5-10 years, renewable. If the purpose is to develop infrastructure or public facilities, the maximum lease period is of 50 years.
The main challenges to strategic land management are the lack of financing for land acquisition, the lack of administrative capacities of national and local authorities and the lack of coordination between public entities.
Charges for development rights
Charges for development rights may be levied in two cases:
when a developer makes a request to build at higher density (Floor Area Ratio) than the one allowed for the zone,
when a developer applies for a permit to change the use of the plot from agricultural to non-agricultural.
In both cases, the charge is a compensation in exchange for the permission to develop land. Yet, local governments rarely apply this instrument, mostly because they do not have local ordinances to regulate the technical aspects.
The charge must be paid at the time the development rights are granted. Municipalities have discretion in deciding if they will charge a compensation in cash or through the provision of land and infrastructure improvements.
In many cases, the status of land in the land certificate differs from the land use expressed on the zoning regulation. For instance, agricultural land is located in a residential or commercial zone. As a result, the charge for re-zoning is rarely adopted in the country.
The main obstacles are the lack of a national legal framework and of local regulations. In addition, many local governments do not have sufficient administrative capacity. In second-tier cities the demand for building at higher density or for urban expansion is low. When the charge is actually implemented, developers frequently appeal against it, claiming that it is not economically viable to them.
References
[3] OECD (2022), “Subnational government structure and finance”, OECD Regional Statistics (database), https://doi.org/10.1787/05fb4b56-en (accessed on 13 January 2022).
[8] OECD (2021), “Subnational government structure and finance”, OECD Regional Statistics (database), https://doi.org/10.1787/05fb4b56-en (accessed on 25 November 2021).
[2] OECD (2017), Land-use Planning Systems in the OECD: Country Fact Sheets, OECD Regional Development Studies, OECD Publishing, Paris, https://doi.org/10.1787/9789264268579-en.
[1] OECD/UCLG (2019), 2019 Report of the World Observatory on Subnational Government Finance and Investment - Country Profiles, OECD/UCLG.