Collaboration between the government and property developers through innovative infrastructure financing based on Land Value Capture

Jakarta, 15 December 2021 - Urban infrastructure is very important to accommodate the high density of urbanisation that occurs in big cities in Indonesia. The Indonesian government needs to accelerate infrastructure development to address the needs and demands for public services to support sustainable urban development. But regional development cannot be separated from integration with infrastructure and collaboration between all stakeholders.

Deputy Minister for Regional Development and Spatial Planning Coordination of Coordinating Ministry of Economic Affair, Dr. Ir. Wahyu Utomo, MS, said, “The Government of Indonesia is optimistic to achieve the long-term target in 2045, to make Indonesia as one of the developed countries or “Indonesia Maju 2045”. Considering the infrastructure development is expected to support economic growth in order to achieve the target, the infrastructure sector is still one of the Government of Indonesia’s main priorities in 2022 to drive the national economy and investment. Referring to the indicative budget allocation in 2022, The Government is committed to allocate IDR 383,8 trillion for infrastructure development. However, the state/regional budget has limitations in fulfilling the investment needed. In relation to that, the Government of Indonesia has developed several strategies and recommendations of alternative finance schemes for infrastructure, in which land value capture is one of them. The Government is currently working on preparing the Presidential Regulation to make LVC be feasibly implemented in Indonesia.”

According to Asian Development Bank (ADB), the Indonesian government is estimated to need US$428 trillion to build infrastructure. For this reason, it is necessary to provide financial resources through public finance reform, private sector financing, and exploration of innovative financing sources. The private sector also needs support from the government for good access and arrangement/zoning to maintain the value of an area. An important example of an innovative source of financing is Land Value Capture (LVC). LVC is a series of mechanisms used to monetise the increase in land/land value that arises as a result of infrastructure development in an area. In quantifying this mechanism, an economic cost-benefit analysis that focuses on structural investment is needed to convince the government and the private sector of the potential returns to be obtained in the future.

Said Zaidansyah, Deputy Country Director Indonesia from Asian Development Bank (ADB), added, “There are three key factors essential to the success of public-private partnerships on LVC in Indonesia: building mutual trust and understanding, identifying shared objectives and benefits, and lastly is finding agreement on LVC delivery mechanisms, based on the shared objectives, that are suitable for any given infrastructure project. ADB will continue to support Indonesia to enhance the LVC governance framework in the implementation of LVC mechanisms, through transaction support, technical assistance or policy based lending."

Ming Zhang, South East Asia and Pacific Manager for Urban, Resilience, and Land Global Practice from World Bank, said, “The World Bank has collaborated with the Coordinating Ministry for Economic Affairs on LVC agenda - cross regional analysis of enabling conditions for LVC and elaboration of illustrative model LVC scenarios in growing Indonesian cities.”

The Government of Indonesia is exploring the possibility of using LVC as an innovative vehicle for infrastructure financing. LVC is a relatively new concept in Indonesia, and includes many concepts that are new to the Indonesian real estate market.

Julian Smith, ESG, Government, and Infrastructure Advisor from PwC Indonesia said that, “LVC has the potential to be applied as part of an integrated urban development management approach, to address many of the main problems and challenges, especially regarding fiscal barriers to infrastructure development. Several cities around the world have successfully implemented LVC to finance infrastructure projects such as London, Hong Kong, New York City, Hyderabad (India), Manizales (Colombia), and São Paulo (Brazil). Given the right regulatory and institutional arrangements, Indonesia can replicate these successes and realise additional funding for its infrastructure needs.”

Farchad H. Mahfud, Business Development Director from PT MRT Jakarta (Perseroda), added, “Property or estate development has to be investible for the private sectors to allow development by private investment. In order to do that, we have to provide support to the private sectors in terms of incentive, demonstrate LVC is advantageous in key Transit Oriented Development (TOD) areas, showcasing ongoing/successful TOD project and offer clear and quick permitting processes for the investors, lastly, together developing with local governments as regulator.”

Hilda Savitri, Finance and Risk Management Director from PT Hutama Karya (Persero), commented, “Our challenge is the coordination between the stakeholders involved. I think cooperation and coordination on the regional level is crucial for the success of LVC in the future.”