Infrastructure development in Indonesia faces some challenges. According to data from the Committee for the Acceleration of Priority Infrastructure Delivery (KPPIP), the key challenges in national strategic projects are land acquisition (40 percent of total case projects), the construction process (23 percent), financing (18 percent), planning and preparation (11 percent) and licensing (8 percent).  

The government would accelerate the land acquisition process. In the omnibus law, Chapter VIII Part 2 Article 123 revises Law No. 2/2012 on land acquisition for development in the public interest. The article increases the number of sectors considered to be in the public interest from 18 to 24.

The additional sectors are upstream and downstream oil and gas industrial zones, special economic zones, industrial estates, tourism estates, food estates and technology development estates.

Furthermore, the land acquisition process will be accelerated, because there is a provision in case eligible parties, managers and users of state or regional property do not attend the public consultation after being properly invited three times, they are deemed to have approved the development plan.

For the sake of efficiency and effectiveness, land acquisition for public interest projects that covers an area of not more than 5 hectares can be carried out directly by parties requiring the land with the entitled party.

The omnibus law also accelerates the compensation process. Chapter VIII Part 2 Article 123 revises Article 42 of Law No. 2/2012, so that, if an entitled party refuses the form and or amount of compensation based on the results of deliberation or the decision of the district court or Supreme Court as referred to in Article 38, the compensation shall be deposited with the district court. Article 123 also revises Article 34 of Law No. 2/2012, stipulating that the amount of compensation based on the assessment of the assessor is final and binding.

However, we believe the land price valuation from the appraisal may be challenged in courts even though the article stipulates that it is final and binding, because Article 38 of Law No. 12/2012 still exists. Accelerating land acquisition will be a positive catalyst for the construction sector.

 In addition to the accelerated land acquisition process, the government also establishes a land bank, as stipulated in Article 125 of the omnibus law. A land bank is a special agency that manages land and carries out planning, acquisition, procurement, management, utilization, and distribution of land.

The land bank guarantees the availability of land for public purposes, including infrastructure development. The government hopes that the land bank can accelerate land acquisition, which would be positive for infrastructure development by preventing cost overrun for infrastructure projects.

Regarding infrastructure financing, the government will establish a SWF as stipulated in Chapter X Part 1 Paragraph 2 articles 165-172 of the omnibus law concerning investment management institutions (LPI). The LPI is an international and domestic fund manager that focuses on financing infrastructure projects and aims to increase and optimize asset value in the long term.

The initial capital for the LPI is set at a minimum of Rp 15 trillion (US$1.02 billion) consisting of cash, state-owned assets and state receivables. If the investment management institution's capital decreases significantly, the government can increase the return of the investment management institution's capital. The LPI can make transactions, either directly or indirectly.

The government plans to allocate initial capital of Rp 75 trillion for the SWF. The government hopes that the LPI can attract investment funds of up to three times the initial capital, or Rp 225 trillion. However, the challenges include difficulties in getting investment funds. Given the sluggish economic situation and high bond yields, the market is not conducive.

The establishment of the SWF will provide an alternative source for infrastructure funding. The SWF can improve the financial state of construction businesses, which are currently increasing their financial burden.

The COVID-19 pandemic has put pressure on the construction sector due to the postponement of a number of construction projects, both for infrastructure and property development, which has resulted in a decrease in revenue and cost overruns that adversely affect construction companies’ cash flow.

Liquidity at construction companies has become tighter and the financial burden is increasing. In recent years, the financial state of construction companies has been quite difficult as reflected in declining revenue growth and the rising debt burden of construction companies.

Furthermore, there are government efforts to accelerate the implementation of national strategic projects, as stipulated in Chapter X Article 173 of the omnibus law on the ease of national strategic projects. Article 173 states that the central government or regional administrations are responsible for providing land and business permits for national strategic projects. Land acquisition can be carried out by a business entity if the central government or regional administration is unable to do so. Eased licensing and accelerated land acquisition will certainly accelerate the implementation of national strategic projects, which will drive the construction sector.

Currently, there are 223 national strategic projects and three programs with a total investment of Rp. 4,150 trillion. National strategic projects are financed from the private sector at 59 percent of the total investment, while the government provides 10 percent and state-owned enterprises provide the remaining 31 percent. Ease of investment in national strategic projects is key for reaching those investment targets.

The government also facilitates licensing in the construction sector. The omnibus law’s Chapter III Article 52 revises Law No. 2 of 2017 on construction services. In general, Article 52 simplifies licensing and the ease of investment in the construction sector.

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The writer is a senior regional analyst at Bank Mandiri.

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