Indonesia

News Research
To be or not to be
- We are glad to know that the potential passing of the long awaited “Land Acquisition” bill this month is now looking more likely.
- The parliament and the government finally agreed to make substantial changes including removing the section that endorses private interest in the bill, shortening the time line to clear the land and determining compensation mechanisms.
- The direct beneficiaries of the Land Acquisition law are toll road operators and construction companies. Indirect beneficiaries include cement producers and property developers.

One last shot
“To be or not to be, (passage of the Land Acquisition bill) that is the question” we have been asking the government since 1H11. The government has been pushing back the target every quarter ever since. However, we are glad to learn from a leader of the committee (Pansus) overseeing the bill that the long awaited Land Acquisition bill is slated to be passed as a law on Dec 16. “I am 90% sure that the bill will be passed this month,” the leader told us, adding that, “The 10% is God’s will.”
If the bill is passed, it will be a nice year-end surprise indeed. In Oct, we heard that the committee had only finished discussing 18% of the total articles (please see our previous report: MYTH Busters: Infrastructure investment still occurring even without the landbill). The bill could be passed as early December 16, before Parliament goes on recess for the year.

Why this bill is so important? We actually already have a Presidential Decree No. 36/2005 on Land Acquisition for the Implementation of Development for the Public Interest. However, the decree does not provide enough legal power to make people move from their land. Thus, the government is proposing this new bill to address the need for infrastructure which will help improve and broaden distribution networks in the world’s largest archipelago. The implementation of eminent domain in the country is a significant development which could speed up development.
The potential law would increase Indonesia’s competitiveness by lowering distribution costs. Currently the distribution costs of companies operating in Indonesia may reach up to 10% of total operating costs due to the absence of good infrastructure, vs 8% in Malaysia, 6% in Singapore, and less than 10% in the Philippines.
In addition, the bill will reduce inflationary pressure. Indonesian CPI has fallen to a 19-month low in Nov11, to a 4.15% YoY increase. This was the smallest gain since April of 2010. This has given the central bank room to lower the reference rate even more after the 75 basis-point cut in the past few months. With better infrastructure, inflation should continue to trend downwards.

To refresh our memory, President Susilo Bambang Yudhoyono approved a draft on land acquisition bill (Dec 2010) to be sent to the House of Representatives. The House then established a special committee (Pansus – consisting of 30 people from eight parties. The members are coming from at least three commissions (commission II – overseeing domestic affairs, commission V – housing and commission VII – energy and environment).
In August, the number of Pansus members was trimmed down to 20 (and called Pantia Kerja or working committee) so they could work faster and more efficiently. Deliberation of the bill was overseen by Pansus, which is helmed by a politician from the Indonesian Democratic Party of Struggle (PDIP – led by Megawati Soekarnoputri), and assisted by four deputies.

Unpopular move. Land clearing has been one of the main hurdles in infrastructure projects aside from lack of funding. Indonesia is a democratic country with a population of more than 240m and 34 political parties participated in the 2009 election. Although at the end there were only eight parties in the House of Representatives, all of them have one goal in common, which is to keep their constituents happy. So we understand if discussion of the bill aimed at forcing people off their land might meet resistance.

One last shot. Assuming that nothing goes wrong in the plenary meeting next week, and the bill is passed, the government will have 12 months to formulate the implementing regulation (PP). Meanwhile, the President will have 30 days to sign the bill. From our previous talk with the National Land Agency (BPN), it has already formulated the implementing law, so we expect less than 12 months for them to come up with the implementing regulation.
If they miss? Note that the House of Representatives will have a month’s break after Dec 16. This is the last chance for the House to get the bill passed this year. If they don’t pass it next week, most probably they will have to do it in 1Q12.
The first draft of Land Acquisition for Public Interest Development consists of 11 chapters and 73 articles aimed at securing potential locations and speeding up the land acquisition process, so infrastructure projects can be developed after giving fair compensation to land owners. Article 13 stipulates the kinds of infrastructure-related projects which are deemed in public interest, and will be endorsed by the bill. Transportation networks (public roads, bridges, tunnels, etc.), power projects (transmission networks, geothermal, oil and gas-related), public schools, hospitals, and conservation areas are among the many infra-related projects supported by this bill.
What are the key points from the newest version of the bill?
1. More power to BPN and regional governors. The soon-to-be law is expected to give authority to the National Land Agency – BPN (both central and local) to clear up land for the public-interest. The central government, through Bappenas (the National Planning Agency) will do the master plan but will look up from the regional’s spatial development plan.

We see this as a positive sign given the fact that local governments would be competing against each other to show that the province makes so much progress under the particular governor. More projects also mean more cash – more wealth for the region and hopefully the wealth trickles down to people at the bottom.
2. Shorter time line. Article no. 27 in the first draft provided four years (two years extendable for another two years) at the most to clear the land. However, in the revised version of the draft, only two years max are given to clear up the land (one year extendable for another year). We view this as another positive indicator that law makers understand the gravity of infrastructure projects.

3. The removal of private interest. The first draft mentions private interest in Chapter III - article 11 and 12, and the whole Chapter V. The current working committee Pantia Kerja has scrapped all plans for private interest because the bill is dedicated for public interest only. We think this is fair enough.
4. Four mechanisms to compensate people. The previous discussion in June resulted in a proposed five mechanisms to compensate affected landowners. But now, the government and the House finally agreed to remove “Rental” from the mechanisms because renting means no change of ownership and is against the principles of the bill. If landowners do not agree with compensation terms, they can go to their local district court (PTUN) and if their case is not resolved, they can appeal to the Supreme Court. We actually would have preferred PTUN’s verdict to be the final verdict because it can shorten the land acquisition process.
The implementing regulation (PP) will regulate all the details of what types of projects will work with selected mechanisms. For example, public roads or schools which don’t generate profit would not allow for profit sharing or shared ownership. We understand that the mechanisms are meant to reflect democracy and maintain the party’s popularity but we hope these good intentions will not complicate things.

Independent appraisals. While already part of previous discussions, the government will provide landowners a list of independent appraisers to choose from, to value the disputed land. The appraisers will have to be registered both with the Finance ministry and BPN. This will theoretically provide landowners with a fair and final assessment of the value of their land.
Silver bullet? Not really. We expect there will be some time lag until the implementing regulation (PP) is ready. Moreover, there will be a max of two years to resolve land disputes (we refer to point 2). We don’t think that the bill will be able to remove all bottlenecks in infrastructure projects at once, but we are happy to know that the House and government are making good progress and heading in the right direction. At least, the soon to be law will give certainty over the land acquisition process, and when construction can start. We have to see how the government elaborates the law in the PP.
The government through Bappenas has been socializing that companies may start construction although they have not yet cleared the land 100%. This may impose a risk for the company, but it also means that the government has great faith that the companies will eventually solve their land clearing problems. We have a case from toll road operator Jasa Marga (JSMR IJ - Rp3,875 - BUY) which has started construction at Jeruk Meruya section – JORRW2N. (please see Sarina’s report Connecting the dots).
We also have 24 idle toll roads which are facing land acquisition problems. The government has actively revisited the terms and conditions for the projects so they are economically viable again. The Public Services Agency (BLU) also announced a Rp3.58tn (US$393m) budget commitment to assist land clearing for the idle toll roads. Bakrie’s Pemalang Batang toll road is also one of the beneficiaries from the budget. We also have at least three institutions which provide financial backups for infra-related projects (figure 6).

The direct beneficiaries of the Land Acquisition Law are toll road operators – we like Jasa Marga (JSMR IJ - Rp3,875 - BUY) as a pure domestic play and the most resilient one. Tariff adjustment is an inflation hedge. In addition to Jasa Marga, we also have another toll road operator called CMNP (CMNP IJ - Rp1,510 - N-R). Bakrieland (ELTY IJ - Rp106 - BUY) also has exposure to toll roads, which contributes 6% to revenues.
We believe that construction of toll roads will also spur commercial and residential development in the area. Thus, we include cement producers as the indirect beneficiaries of the law together with property developers and construction plays. We like Indocement (INTP IJ - Rp15,300 - BUY), Semen Gresik (SMGR IJ - Rp9,550 - O-PF), and Holcim (SMCB IJ – Rp2,750 – BUY).
Source: CLSA dated 7 December 2011