Indonesian PPPs in the fast lane

Public infrastructure projects in Indonesia have long been stymied by difficulties, uncertainties and delays related to land acquisition.

These circumstances have primarily been the result of two characteristics of the Indonesian legal system. First, a large amount of land in the country has no formal title registration. This is known as unregistered land. Second, Indonesia has never had an established procedure for compelling the sale of private land for public purposes.

Market participants are optimistic that the latter issue may be addressed by Indonesia’s Law No 2 of 2012 on Land Procurement for the Public Interest and its first implementing regulation PR 71/2012.

The latter provides details on the procedure for identifying, assessing, appraising and acquiring land for public infrastructure projects, and includes a procedure whereby an unwilling land rights holder can be forced to sell their rights for an amount of compensation approved by court review.

The regulation also helps address the issue of unregistered land by referring to holders of ‘customary land rights’ as being potentially eligible for compensation.

Initial reactions to PR 71/2012 have been mixed. The business community has expressed disappointment that the regulations do not appear to provide immediate benefit to private developers that have already commenced the land acquisition process for infrastructure projects.

Ongoing infrastructure projects are to continue the land procurement process under predecessor regulations that provide a different assessment procedure and do not give a clear basis for compulsory sales based on court review.

The failure to provide immediate relief for ongoing land procurement is a reasonable basis for criticism. Many private developers have found that the land acquisition process in Indonesia exceeds timing and budgetary estimates. But keeping the focus on land procurement for new projects is consistent with the Indonesian government’s policy that a private developer should not seek enhancements to their original agreement with the government after their appointment.

PR 71/2012 and related regulations have the potential to facilitate Indonesia’s development plans through new projects implemented as PPPs by increasing the capacity of administrative agencies, ministries and other governmental bodies to acquire sites. Indeed, the primary audience for these regulations appears to be the Indonesian government itself.

Governmental bodies have previously been reluctant to undertake land acquisition, preferring instead to require that this burden is borne by private developers.

If these public bodies have confidence in the new procedures they may be more willing to acquire land for public infrastructure themselves and leave the private sector to get on with the tasks of development and construction.

This could lead to more efficient risk allocation for public infrastructure projects and therefore be a significant step forward in promoting the efficient delivery of Indonesian PPP projects to the market.

James Harris, head of infrastructure and project finance (Asia), Hogan Lovells, and Justin Patrick, foreign legal adviser, Hermawan Juniarto