IMPLEMENTING INDONESIA’S NEW HOUSING POLICY:THE WAY FORWARD. Draft

7/31/2019 IMPLEMENTING INDONESIAS NEW HOUSING POLICY:THE WAY FORWARD. Draft

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IMPLEMENTING INDONESIAS NEW HOUSING POLICY:THE WAY FORWARD

Findings and Recommendations of the Technical AssistanceProject Policy Development for Enabling the Housing Market

to Work in Indonesia.

Marja C. Hoek-Smit

Based on the Reports Produced by the Team of Consultants under the Policy

Development for Enabling the Housing Market to Work in Indonesia Project

June 2002

Kimpraswil, Government of Indonesia and the World Bank


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TABLE OF CONTENTS

ACKNOWLEDGEMENTS

EXECUTIVE SUMMARY

1.0 INTRODUCTION1.1 Background to the report 011.2 HOMI in context 011.3 Key Characteristics of the Housing Market 021.4 National Development Strategy 041.5 Principles and Main Strategies of a New Housing Policy 05

2.0 STABILIZING THE HOUSING ENVIRONMENT2.1 The Importance of Good Governance 08

2.2 Creating an Effective Public Environment 082.3 Lowering the Risk of Housing Investment 092.4 Ensuring Good Quality Housing Assets 10

3.0 MOBILIZING HOUSING CREDIT3.1 The Importance of Housing Finance 113.2 Expanding and Strengthening the Primary Market 133.3 Long-term Funding for Mortgage Finance 163.4 Developing Low Income Housing Finance 193.5 Strengthening the Regulatory Environment 21

4.0 FACILITATING SPEEDY RELEASE OF SERVICED LAND4.1 Main Issues Constraining Land Supply 23

4.2 Improving the Efficiency of Land Titling and Registration 234.3 Facilitating the Supply of Land and Improving

Permitting Process 254.4 Completion of the Decentralization of Land Administration 29

5.0 PROVIDING HOUSING ASSISTANCE5.1 The Demise of the Old Subsidy Programs 315.2 Goals and Design Criteria for New Housing

Assistance Programs 345.3 Three Complementary Subsidy Programs for Housing 365.4 Home-owner Assistance Programs to Increase

Access to Finance 375.5 Neighborhood Block Grants to Local Governments

for Upgrading and Mixed Development 435.6 Incentives for Local Rental Housing Provision 46

6.0 SUPPORTING PARTICIPATION PROCESSES 48


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7.0 RATIONALIZING GOVERNMENT INSTITUTIONAL CAPACITYIN THE HOUSING SECTOR7.1 The Changing Government Housing Context 497.2 Clarifying Public Sector Functions and Relationships 49

7.3 A New Housing Agency and Housing Fund 497.4 The Role of Existing Statutory Housing Agencies 58

8.0 CO-ORDINATING GOVERNMENT INVESTMENT 61

9.0 CONCLUSIONS AND PRIORITY ACTIONS 62

Appendix 1 Summary of Main Issues Related to Demand for Low andModerate Income Housing 63

Appendix 2 Affordable House Prices for Household Income 69

Appendix 3 Cost Comparisons of Different Finance Linked Subsidies 71

Appendix 4 Financial Sector/ Mortgage Finance Indicators and 72Lending Portfolios


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Acknowledgements

The HOMI (Housing Market Indonesia) project as it was fondly called, was based in the

Directorate General of Human Settlements Development (DGHSD) in the Department of

Settlements and Regional Infrastructure (Kimpraswil). It was a major program with severalcomponents -- housing and land markets, housing finance, housing assistance programs,

community-based housing-- each staffed by independent teams of international and local

consultants and supported by local counterparts and an inter-ministerial Technical Committee.

To name all those we worked with in the course of this project would be impossible. We would

like, however, to express our particular appreciation to Ir. Djoko Kirmanto, the then Director

General of DGHSD; and to Ir. Imam S. Ernami, Director of Technical Support, and Dr. Ir. Iskander

Saleh, special advisor Housing Finance Division, for all their support, discussions and

suggestions. Our counterparts deserve special thanks, since they were the buffer between the

team and the internal and external environment and were an invaluable source of local

knowledge.

Marja C. Hoek-SmitJune 2002


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1.0 INTRODUCTION

1.1 Background to the Report

The Government of Indonesia (GOI) through the Ministry of Kimpraswil, Directorate General

Housing and Human Settlement with support from the World Bank, to launch a technical

assistance project to support a housing policy reform project; Policy Development for

Enabling the Housing Market to Work in Indonesia. This report is a summary of the

conclusions and recommendations of the main reports produced for the different components of

the study by separate consulting teams. It is meant to facilitate access to the vast amounts of

information contained in eleven different reports.1

The authors of the different reports were: Sally Merrill and Erica Soeroto for Housing Finance,

Michael Lee, Sally Merill, Arie Hutagalung, Bob Sudjana Tantra on Land and Housing Markets, JoSantoso, Dodo Juliman and Budi P. Iskandaron Community-based Housing Programs and

Institutional Arrangements. Widiarto, Budi P.Iskanderand myself worked on the overall Policy

Framework and New Institutional Arrangements, and I was responsible for the Housing Demand

study and the Finance linked Home-ownership Assistance Programs and with Douglas Whiteley

for Mortgage Insurance.

1.2 HOMI in Context

By standards of many of its Asian neighbors the housing and housing finance sectors in

Indonesia are under-performing. Housing investment in Indonesia is approximately 1.5% of

GDP, compared with a range of 2% to 8% in comparable countries. Similarly, mortgage finance

equals 25% of GDP in Malaysia, while in Indonesia this figure is only 3%. Housing has the

potential to be an important economic sector, contributing to job creation, expansion of the

finance system and creation of household wealth. Housing can also be a powerful tool in

redistributing income or wealth. Economically, financially and socially the sector could play a

more prominent role in the recovery process.

Certainly the low and uncertain incomes are an important factor in the limited role housing plays

in the economy. The weakness and inefficiency of the financial sector further hinder expansion of

a healthy housing delivery system.

1While summarizing the analyses and main recommendations provided in the different reports, I have clarified some of

the arguments, adjusted the structure where that appeared helpful, and altered, some recommendations.


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However, housing institutions, policies and programs impede the efficiency and

expansion of the sector. There is not a clearChampion for the housing sector that can

calibrate public and private sector housing inputs. Functions and tasks are scattered throughout

different agencies and departments without clear coordination and without a view to

decentralization of the housing functions. Under the current housing policy system, the delivery

of market produced non-subsidized housing units for low- and moderate-income groups has

declined (although the slow economy has also contributed). Production is nearly entirely

dependent on the KPR interest rate subsidy. Yet, no households below the 60th

percentile of the

income distribution can afford a 21 m2

RS house.

GOI through the Ministry of Kimpraswil, Directorate General Housing and Human Settlement,

decided to develop a new housing policy framework in line with the new development objectives

for the country. The Homi teams consolidated contribution to the development of a new housing

policy and strategy for the country is the starting point for what surely will be a long-term policyreform effort. Detailed analyses on the housing and land market, the housing finance system,

housing finance subsidy programs and community-based support programs, and proposals for

institutional change are provided in individual reports. This report summarizes the main policy

recommendations in the context of the teams proposed new policy framework.

1.3 Key Characteristics of the Housing Market

What are the key characteristics of the Indonesian housing market facing policy makers?

Housing shortage in urban areas. Preliminary census 2000 data show that there areroughly 21 millions households living in urban areas (42 percent) and 28.8 millions in

rural areas (58 percent). The total population grew by only 1.19 percent during the last

decade, down from 1.95 in the previous decade. However, all growth occurred in urban

areas, which grew by more than 4 percent. If we assume these trends to continue during

the next decade (using an estimated urban growth rate of approximately 3.5 percent for

the next few years) Indonesia needs to house roughly 735,000 new urban households

per year. These figures do not include the housing backlog --the number of households

currently living in overcrowded and unacceptable housing units. Comparing this

requirement for new urban houses with the average formal sector, KPR financed housing

production of 120,500 units per annum (between 1994 and 1998), the challenge facing

the country is clear.

Different housing requirements of regions and local governments. There are major

differences between the housing needs of different regions. Existing backlogs and

growth figures vary widely. Regions and local authorities also differ in their financial and


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human resource capacity to address their housing problems. Given these differences,

varied policy responses are necessary.

Housing tenure. Approximately three-quarters of urban households are homeowners.

While the emphasis of government policies has been on home-ownership, rental housing

will continue to be vital to housing market operations and labor mobility. Most of the

rental stock is private, both room rentals and house rentals, but Indonesia has a relatively

small proportion of government-assisted and employer rental housing.

Low finance affordability. House prices are modest relative to incomes. The median

urban (outside of the DKJ Jakarta) household expenditures (a proxy for income) are

approximately Rp.800,000 to Rp.900,0002. A modest housing unit costs approximately 2

to 4 times the median urban income. However, with current high mortgage interest rates,

60 to 65 percent of households cannot afford an unsubsidized RS type house (Rp.19

million)-- the lowest priced house currently produced in the market. Appendix 1 provides

a summary of the Housing Demand Study and Income and Finance AffordabilityWorksheets.

Lack of finance availability. Unsubsidized mortgage lending is only available for the

top 25 percent of the urban income distribution. There is a lack of long-term investment

instruments which makes banks reluctant to extend longer-term loans. Collateral risk is

another reason for lack of lending. Lenders are reluctant to provide loans for houses with

a value below Rp.50 million and in risky neighborhoods. The difficulty of acquiring

formal mortgage finance has escalated with the shift to self-employment as a result of

reduction in wage employment after the crisis. While unsecured micro-finance loans are

widely available, the current micro-finance loan instruments are not suitable for new

house construction. There is a lack of other medium and shorter-term loans or credit-line

products suitable for housing. There are welfare costs related to the limited availability of

housing finance and the inefficiencies and small scale of the formal housing production in

general(a) there is a negative impact on affordability, (b) it takes households a much

longer time than necessary to construct a decent house, (c) the entire real estate industry

remains small and inefficient, and (d) with such a large proportion of households under-

served by the market, the demand for subsidies and special requirements for the private

sector grows.

Insufficient serviced land, particularly for moderate and low-income housing. Local

capacity for land administration is weak and hinders the local supply of land for affordable

housing. Equally problematic is the fact that there is an excess of idle landland

suitable for housing development, which is held out of the market, creating unnecessary

land shortages.

2Depending on the CPI inflation ratio applied.


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Fragmented housing policies, programs and administrative systems. There are

currently many departments and agencies dealing with housing, land, residential

infrastructure, and housing finance, whose policies are not well integrated. The main

housing law and related decrees no longer conform to the overall government

development plan and need to be amended. Similarly, there are a multitude of housing,

housing finance, residential infrastructure and urban poverty projects, with fundamentally

different or overlapping types of subsidy systems.

Lack of housing capacity. The predominance of the KPR subsidy system, has

prevented public and private sector experimentation and innovation in the low-income

housing sector. There is an urgent lack of capacity in housing and housing finance.

Uneven enforcement of land and housing policies and regulations. There is much

uncertainty in the legal and regulatory environment related to land, land development,

and construction and housing finance. This drives up costs and risks of doing business

in the sector and makes housing less desirable as an investment sector. Well-developed housing market institutions. The main formal market players

developers, contractors, appraisers and mortgage lenders are competitive and

represented by strong trade associations. Moreover, a wide variety of micro-finance

institutions exist in most regions. While the crisis has weakened both real sector and

finance institutions, there are signs that the market is recovering. Also, as a result of the

crisis, the structure of the mortgage sector has fundamentally changed. BTN is far less

predominant and the environment is one of healthy competition.

A culture of self-construction and mutual help, but a weak NGO support system.

There is a strong tradition of households building their houses incrementally with a

contractor or individual laborers. It is the main way of saving and wealth creation for

households. Themajority of the houses are built in this way. In rural areas the tradition

of communities assisting each other with the construction of houses is preserved. In

urban areas, these self-help efforts require assistance from intermediary organizations.

In most regions this intermediary level of institution does not exist or is provided on a

voluntary basis, hampering the scale outputs required in the low-income sector.

The challenge for the new housing policy is to build and enhance the current strengths in the

housing environment while vigorously addressing the weaknesses.

1.4 National Development Strategy

The transition to a rule-based democratic society requires dramatic institutional reforms. The

housing sector is both influenced by these transformations and can be an important catalyst for

change. Particularly, the ongoing decentralization process and deepening of civil society


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participation will play a critical role in framing the new housing policy. The 1992 Housing Law will

need revision in line with these new developments.

The decentralization laws No.22/1999 and 25/1999 stipulate a drastic increase in the regional

share of government spending. These laws define housing as a function of local government.

The requirements for decentralization decide the type of fiscal allocation to the housing sector at

a national level, and have a profound influence on empowerment of communities and the

provision of local housing resources. While there is not yet complete consensus on the specific

terms of decentralization, and Law 22 and 25 are still under review, it is certain that the new

housing policy needs to be based on the principle of decentralization.

Furthermore, the balance between the decision-making power and the f iscal resources is dealt

with in Law 25, 1999. in order to empower and improve the local economy, create a fair,

transparent, participative, and accountable budget system. Law 22, 1999, section VIII, article83.1, focuses on ways in which people engage in local governance. It specifies that participation

is both the right and the responsibility of the people in order to create a sovereign state (section

VI article 8). Thus, decentralization and participation are closely connected. In addition Law

No.28/1999 (part of the anti-corruption measures)also stipulates the requirement for local

participation.

Propenas. Another major influence on the housing sector is the national development plan for

the five year period 2000 to 2004 as laid out in Propenas. This development strategy

emphasizes empowerment of economic actors while at the same time decentralizing the

government.

to fill the inter-regional and urban-rural disparities, to overcome the crisis impact, the centralgovernment devises new policies. The central government allocates more funds directly to localgovernments, boost efforts to alleviate poverty and stimulate economic activities. However, theseefforts will be redundant unless the government successfully empowers economic actors,especially low-income people. In this respect, better access to economic as well as naturalresources for low-income people should be improved.

3

The new housing policy will have to be framed within the parameters of these national

development strategies.

1.5 Principles and Main Strategies of A New National Housing Policy

The transformation in the political and development strategies of the country have not yet been

translated into a coherent housing policy framework. The 1992 Housing Act does not reflect the

basic development and decentralization changes and needs to be adjusted. Initial housing


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objectives were formulated in Propenas and in Kimpraswil documents. These need to be

consolidated into consistent strategies. HOMI was asked to assist in that process. Below we

propose the fundamental principles and strategies for the housing sector in line with the national

development goals.

1.5.1 Vision and Goals

Housing includes land, services and infrastructure, finance, different production agents, etcetera.

There is currently no real Leader or Champion for the sector, which can integrate and coordinate

the different components. Without such leadership, an integrated housing policy for the country

cannot be developed. HOMIs first recommendation is to establish an Inter-Ministerial

Committee as the Champion and Visionary for the sector. TheInter-Ministerial Committee

should be supported by specialized sub-committees, which prepare opinions and lead policy

changes related to the different sub-sectors of housing.

Under the guidance of the Inter-Ministerial Committee, a new housing law will have to be

developed, stating the vision for the housing sector and the overall goal towards which all

implementers of the housing policy should work. In a decentralized environment, central

government will define broad national housing goals. In addition, central government must

ensure that regional and local governments set housing goals. These goals will include housing

delivery targets --houses or serviced land delivered with central and local government assistance

and housing delivery by private sector actors-- as well as institutional development goals.

However, visions and goals are only as good as their implementation strategies, to which we

focus our attention.

1.5.2 Fundamental Principles

To guide the current transformation in housing policy, it is critical to formulate clear principles that

need to govern housing policy development in Indonesia at all levels and to make it consistent

with the development strategy of the country.

Partnership and participation. Government is committed to have people participate

democratically in the processes of housing policy decision-making. Governments role is

to provide financial resources and the necessary regulatory and support structures for the

private and community sector to deliver housing.

Fairness and equity. The housing policy must promote fairness and equity among all

Indonesians. Government programs will need to provide a wide range of support options

and not discriminate in terms of location, income, gender, religion or creed.

3Propenas Tahun 2000-2004, UU RI No. 25 Tahun 2000, CV Tamita Utama, Jakarta, page 312, BAB IX, Pembangunan

Daerah.


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Quality and affordability. Housing must be built to an acceptable quality and at prices

people can afford.

Innovation. The housing policy should foster innovation, creativity and diversity,

particularly in terms of the products provided and the environments that are created.

Transparency and accountability. The housing policy should be implemented with

transparency, both in financial and allocation procedures and particularly in terms of

housing assistance programs and the related flow of funds. It is vital that appropriate

monitoring systems are implemented and that responsible authorities and implementers

are held accountable for performance against clear standards.

Sustainability and fiscal affordability. The government has insufficient resources to

meet the needs of all underserved households in Indonesia. Sustained and substantial

investment in housing from the private and household sector is essential. Thus a central

focus of the housing policy is to create a normalized market that will attract maximum

private investment.

Applying these principles to the design ofhousing subsidies, we can summarize that programs

should be transparent, well-targeted, on-budget, based on the need for fiscal discipline,

administered in an efficient and effective manner, provide incentives for the strengthening of

market and public institutions, and be tailored to meet the varied needs of lower-income

households in differing circumstances. Subsidies should be designed to leverage household,

financial sector and local government investment in housing. The allocation system should

conform to future decentralization requirements.

1.5.3 The Seven Strategies Of The National Housing Policy

Following the policy objectives specified in the Kimpraswil documents and the HOMI TOR and

subsequent analysis, we have defined seven key strategies for implementation of Indonesias

National Housing Policy. These strategies serve the purpose of bringing together main policy

activities in a coherent framework for implementation:

1. Stabilizing the housing environment

2. Mobilizing housing credit

3. Facilitating speedy release and servicing of land

4. Providing subsidy assistance

5. Supporting participation processes

6. Rationalizing institutional capacity and housing investment

7. Coordinating government investment in development


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A wide range of policy initiatives, acts, and institutions has been created, or are proposed by the

HOMI team, to implement these strategies. We will summarize these initiatives below and

indicate in which HOMI reports details can be found.


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2.0 STABILIZING THE HOUSING ENVIRONMENT

2.1 The Importance of Good Governance

The stability and transparency of the legal and political environment is critical for housing systemdevelopment. It affects to a great extent the efficiency of the housing system, its ability to attract

private and NGO partners and foreign funds. The following issues have to be addressed:

Creating an effective public environment

Lowering the perceived risk in the low and moderate-income sector of the housing

market, by ensuring that contracts are upheld, regulations enforced, procedures

standardized and executed in a timely fashion, and risks shared among appropriate

partners.

Ensuring good quality housing assets.

Most of the issues we discuss here are detailed in the sections on finance, land, subsidies and

institutional structure in this report. It is important, however, to summarize the fundamental legal,

process, and institutional issues that hinder the healthy growth of the housing sector. Technical

improvements alone will not make a difference if the housing sector does not provide a stable

investment environment.

2.2 Creating an Effective Public Environment

The public sector can only play a supportive role when funding and legal issues, and institutional

functions are well defined and focused on the healthy expansion of the housing sector.

Funding.

o The current uncertainty in the level and type of private and public funding for

housing hampers participation of the private sector and other housing actors. A

multiyear funding plan to improve access to medium and longer-term funds for

the private sector and for new housing subsidy programs needs to be put in

place to provide sufficient confidence for private and NGO investment.

Legal Framework.

o The decentralization law and agrarian land law are being amended and the final

outcomes are not yet known. This creates insecurity in the land and housing

policy environment and impedes the development of strategies that clearly

incorporate and are based on the principle of decentralization. The strategies

detailed in this report assume a decentralized budget and housing context.

o The Housing Law No. 4/1992 needs amendment before it can serve as the legal

basis of the housing system. The law should be redrafted to define the new roles


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of central, regional and local government and civic society. Chapter 7 begins to

detail a new division of functions for housing in a decentralized environment.

Institutional Framework.

o Current housing agencies lack the coordinating and professional capacities to

guide the housing sector in the new ways set out above. We recommend a new

institutional structure for the housing sector in Chapter 7.

o The new roles of the statutory housing agencies Perumnas and BTN-- are

unclear. Assessments of Perumnas have been conducted and a new

assessment of BTN has recently been completed. We comment on the

proposals in the section on rationalizing institutional capacity below.

State Capture related to the formation of policy and establishmentof laws and

regulations. Currently, widespread influence peddling by private and public sector actors

and major conflict of interest issues characterize decisions on:

o

Functions of existing state housing institutions, their recapitalization, continuationand (hidden or implicit) subsidy provisions. Equally, undue influence may

hamper efforts to establish new public housing institutions.

o Design, legislation and fund allocations for new or existing special housing

assistance programs. We suggest a re-arrangement of government housing

functions and institutions that would create a necessary distance between the

political and legislative, and executive branch of government related to the

execution of housing assistance programs (see Chapter.

2.3 Lowering The Perceived Risks Of Housing Investments Impressive progress was made during the last decade in issuing property rights to

residential plots-owners. This access to titles will facilitate the implementation of

proposed strategies. Additional improvements are suggested in Chapter 4.

Majortitle risks still exist in the process of land acquisition by developers, which

hampers borrowing for subdivision and infrastructure, and even access to construction

finance. See Chapter 4.

Current planning and building regulatory and approval procedures vary widely by

local government, and delay residential development. We propose that standardized

procedures for local government land allocation, subdivision, permitting, and

infrastructure agreements be developed. (See Chapter 4)

In the housing finance system unnecessary risks exist because of unclearappraisal

systems, mortgage contracts, and foreclosure procedures. Suggested

improvements are summarized in Chapter 3 and detailed in the in the finance sector

report.


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Default risk and costs are hindering the lowering of LTV ratios and the perceived

quality of mortgage portfolios. HOMI proposes consumer education and a possible

future private mortgage insurance system to mitigate the default risk to lenders.

Corruption related to the implementation of law, rules and regulations is widespread and

adds to the cost and risks of housing and unnecessary poor quality of the urban

environment. Some of the most critical areas to address are:

o Enforcement of land administration regulations such as the location permit

system, approval of land subdivision and building plans.

o Implementation of foreclosure procedures.

o Administration of new subsidy programs. Incentives should be built in to prevent

moral hazard and rent-seeking behavior by lenders, borrowers and subsidy

issuing institutions. (See Chapters 5, 6 and 7)

2.4 Ensuring good quality housing assets Property rights are critical to enhance the value and transferability of housing assets.

Experiments are ongoing to facilitate the process of normalizing titling.

Sound property appraisals will force discipline on developers and contractors when

finance is sought for housing. HOMI identified improvement of the appraisal technique

and processes as a major requirement for market development.

Quality control will be required on housing produced by developers and contractors as

part of government programs, in particular when the fixed RS/RSS types will be

eliminated. Equally, the quality of the location of government-assisted housing will need

to be monitored in relation to access to basic services.

Neighborhood quality and risk are serious deterrents for housing demand and housing

investment and are often overlooked in housing programs.

The Inter-Ministerial Committee and its sub- committees should play a critical role in developing a

sound public environment for the housing sector and ensuring that regulations are enforced the

way they were intended.


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3.0 MOBILIZING HOUSING CREDIT

3.1 The Importance of Housing Finance

The health and strength of the financial sector are important to both long-term development and

more immediate efforts to alleviate poverty. Mortgage finance will become an increasingly

important part of the financial sector. This pattern has long been observed in emerging,

transition, and developed economies alike, and it is already occurring for some of Indonesias

neighbors, such as Malaysia and Thailand. In Indonesia, however, the housing finance sector is

smaller than it should be. First, the sector has suffered severely from the 1997/98 crisis and has

not yet recovered. Banks are pursuing very risk-averse policies.4

Second, the expansion of the

housing finance market has been inhibited by a housing subsidy policy that is detrimental to

incentives for down-market growth. This situation should begin to change as Indonesia recovers

from the financial crisis and economic growth reasserts itself over the medium term and housing

policy will become more enabling.

Housing finance has a number of extremely important roles to play in both the housing market

and the broader economy. First, it increases effective demand for housing by providing financing

of housing upfront to be paid back over time. Housing finance also will deepen the financial

sector and the links of the banking sector to the capital market.

3.1.1 Different types of housing finance

We distinguish three types of housing finance for Indonesia: mainstream housing finance, which

provides unsubsidized mortgage finance to qualifying households (in Indonesia loans in this

category range from Rp. 100 to 300 million, with few lower than Rp 50 million); moderate income

housing finance, with loans of roughly Rp.10 to 25 million (currently, this is primarily limited to the

KPR subsidy system and a few regional banks writing smaller mortgage loans); microfinance for

housing, a non-mortgage finance approach to housing credit characterized by small loans for

example, Rp.10 million or less - used for incremental building, improvement and expansions

(micro-finance loans are widely available in Indonesia, but are designed for Small and Medium

Enterprise development rather than housing).

Ideally, all households that want credit and would qualify should have access to credit for

housing.5

The current housing finance system in Indonesia serves only a fraction of those

households. Mainstream banks limit themselves to roughly the upper 10 percent of urban

4See the report by BI Credit Crunch in the Aftermath of the Crisis.

5See the HOMI Report Effective Demand for Low Cost Housing for complete information on income and affordability .


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households and an even smaller proportion of rural groups. The KPR subsidy system reaches

only a fraction of the eligible households.6

However, for most households, long-term financing is

not appropriate and medium-term or shorter-term financing and/or repeat loans are more suitable.

New loan products, and alternative approaches to underwriting, including non-mortgage credit for

housing-related purposes, should be developed in the micro-finance sector to facilitate the

delivery of authorized moderate/low-income housing. Our recommendations deal with the

development of each of those housing finance sectors.

3.1.2 Structure of the banking industry

The number of private banks has fallen dramatically because of recapitalization of insolvent

banks by the GOI as a result of the crisis. State-owned banks now hold the majority of deposits

(70 percent compared to 37 percent in 1997) and have slightly increased their share of loans

outstanding, from 40 to 43 percent (See Appendix 4). Banks balance sheets are now dominated

by recap bonds and SBI bonds (Bank Indonesia securities).

7

. Capital adequacy and credit riskare the two main concerns in the banking sector.

CAR (capital adequacy ratio) . Despite recapitalization of the banking sector, the CAR position of

many banks is still problematic, and in several cases it is only adequate because of the zero risk

weighting of GOI paper. This situation, combined with chronic land titling concerns and

depositors unwillingness to place medium or longer term deposits with banks, restricts the

interest in expanding long-term lending. The loan-to-deposit ratio has fallen drastically for most

banks post crisis. The liquidity position is not the constraint to initiate loan expansion, but the

CAR is.

Non-performing loans (NPLs)vary highly amongst banks, but are generally high. The majority

of the banks for which HOMI received data had NPLs well over 5 percent. However, mortgage

loans performed much better: by the year 2000, the amount of mortgage loans delinquent for 180

271 days was only 1 percent for national state banks and 2.25 percent for regional banks. Of

course, these are new portfolios since the crisis or mostly restructured portfolios bought from

IBRA. Construction loans continue to perform poorly with 10 to 20 percent default rates.

6More importantly, the KPR subsidy system stifled expansion of housing finance for modest income households, since

most banks considered this part of the market as the domain of BTN (the State Housing Bank) and did not developsystems to reach that part of the market.7

On average 50 percent of assets


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3.2 Expanding and Strengthening the Primary Mortgage Market

3.2.1 Overview

At the end of the year 2000, mortgage lending was only 0.91 percent of GDP, compared to 2.83

percent in 1996, and constituted 4.3 percent of total credit. About one third of the total amount of

mortgage loans outstanding in 1999 was subsidized. To some degree subsidized housing loanssupported the sector during the crisis period. Unsubsidized real estate finance dropped from 2.28

percent of GDP in 1996 to 0.69 percent of GDP in 1999. Construction lending ceased for the

most part. Close to two-thirds of mortgage loans outstanding in the year 2000 was held by state

banks. Bank Danamon has the largest mortgage portfolio since it successfully acquired several

mortgage pools sold by IBRA. While mortgage portfolios perform well, relative to other credit, this

may be related to the risk-averse attitude of banks; banks mostly make loans for high value

properties (Rp.50 million and above) and for housing in non-risky existing or new neighborhoods.

Few banks expressed an interest in moving to smaller loans for less affluent clients. Also, current

interest rates are too high to generate a considerable demand for moderate income mortgagelending (driven by high yield on government bonds and high rates of savings deposits by

institutional portfolios). Most would only consider moving down-market if the government would

have an attractive subsidy program in place, the playing field amongst banks would be level

without preferential treatment of BTN, and land titling and foreclosure procedures would be

improved.

3.2.2 Asset-liability management

The short-term nature of banks deposit liabilities in relation to the fairly long term of mortgage

loans poses a limit on extending mortgage lending. Banks have limited access to long-term funds

from pension funds, insurance companies or capital markets, or mechanism to improve the

liquidity of mortgages. While banks can issue medium term bonds against their pool of

mortgages, this is relatively expensive. With risk free and liquid SBI paper available at relatively

high returns, there is limited appetite to expand mortgage credit.

A combination of GOI policy initiatives to manage and measure risk (e.g., prudential measures to

induce banks to undertake prudent asset-liability management), and develop capital market

funding capabilities (see below) will be required to improve asset-liability management and

increase the scale and efficiency of the mortgage sector.

3.2.3 Underwriting practices and assessing of credit risk

There are severalcritical weaknesses in the underwriting of mortgage loans in Indonesia. We

recommend the following changes:


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Improving and standardizing property appraisals. Appraisals often do not assess real value

of the property, but are based on cost or developers sale price. The appraisal profession needs

to be professionalized and methods need to be standardized.

Establishing a Credit Bureau is an important stepsand one that is already partly underway in

Indonesia. A credit bureau acts as a clearinghouse for credit information on potential borrowers.

Banks, credit card companies and other debt providers would post credit information on all clients

in the bureau. Members can access this information before they issue a loan to an individual,

thus facilitating the decision on whether and how large of a loan to issue and on what terms.

A credit bureau could start with a simple register of outstanding debts and arrears of all

individuals. This effort could be linked with the credit bureau initiative to assist the development

of SMEs undertaken by the Ministry of Cooperatives with ADB support.8

Gradually, more

integrated systems could be developed. The following findings and recommendations should beconsidered:

A special Working Group under the Inter-ministerial Subcommittee on finance should be

established to carry a Credit Bureau initiative forward.

The banks expressed a strong feeling that the Credit Bureau should be private.9

Credit Scoring could be initiated by individual banks simultaneously to the development of a

credit bureau. HOMI recommends that banks intending to be heavily involved in mortgage

lending, implement specialized IT systems for mortgage finance that allows them to gradually

develop the capacity for credit scoring. Banks should develop internal mortgage portfolio

databases. Perbanas may also wish to develop an analysis database, on its own behalf and that

of the smaller banks. Banks should begin to analyze the credit risk fundamentals in their own

portfolio in order to improve their assessment of would-be borrowers. They can combine their

own underwriting models with Credit Bureau data.

8While HOMIs Financial Sector Report recommends one integrated credit bureau for Indonesia, for all types of lending

and users, using one unique structure, this may not be the right structure at this time.9

The Law on Bank Indonesia No.23/1999 specifically article 32 sub-article 1, stating that BI arrange and develop an inter-

bank information system, should be revised.


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3.2.4 Loan Recovery Tools

Improving Foreclosure Procedures. Foreclosure is too often costly and slow. While the

probability of entering into default may be reasonably low, the probability of sustaining major

losses, once a default occurs is extremely high. HOMI recommends the following improvements:

The existing mortgage law is sufficient to accommodate the foreclosure process.However, the mortgage law and the Dutch law of 1848 (RID Art. 200) can come into

direct conflict when the debtor is not cooperative and court action is required. If the

debtor (or legal occupant) refuses eviction, he/she cannot be evicted without a court

order. HOMI makes detailed recommendations on streamlining this conflict.

The new role of the Government Auction Agency, as a policy making body should help

streamline the auction process. See details in the Finance Report.

The Supreme Court should confirm, in the form of a Circular or Guidelines, that the

standard credit agreement meets the criteria for foreclosure in accordance with article 6

ofUndang-Undang Hak Tanggungan (UUHT), which stipulates that the auction requestcan be addressed straight to the Auction Office.

Delays and lack of transparency within the Court offices are responsible for many of the

foreclosure problems. Improvements in court operational procedures fall within the

purview of the Department of Justice.

Establishing Mortgage Default Insurance (MDI). Mortgage insurance can be an important

mechanism to enhance credit quality and entice lenders to move down-market.10

However, non-

assisted MDI is expensive in markets were risk is difficult to assess and collateral not always an

efficient security (see housing assistance section for preliminary calculations). It is unlikely to be

utilized in an already expensive mortgage market and may hamper the growth of the market if

lenders require that borrowers buy MDI. However, private, non-assisted MDI may be important to

facilitate down-market lending when the market normalizes and collateral improves.

3.2.5 Administrative Risk: Improving Standardization

Standardization of information requirements and procedures can considerably improve the

efficiency of the mortgage industry. It will also facilitate the establishment of mortgage insurance

and encourage participation of long-term investors in mortgages.

Standardization of the mortgage documentation is already underway. Draft

documentation has been prepared and submitted to a Task Force.

Appraisal procedures require stricter rules and regulations.

10An assessment of the feasibility of mortgage default insurance (MDI) as a key subsidy instrument has been conducted

as part of the HOMI study and is discussed in the section on housing assistance programs.


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3.2.6 Technical assistance andbank training

HOMI considers training for bankers and technical assistance to niche lenders interested in

low/moderate income lending to be a critical component of a down-market strategy and

recommends centralizing and coordinating these efforts through Perbanas.11

Issues should

include the functions and mechanisms of a credit bureau, credit and mortgage scoring systems,

risk-based pricing and homeowner counseling, servicing systems, foreclosure procedures,

mortgage insurance and methods to reduce operational risks, alternative mortgage instruments to

deal with different risks, and preparing portfolios for accessing long-term funding.

Regional banks and a number of other state and private banks already provide unsubsidized KPR

for moderate income borrowers, although in very modest amounts, and appear interested in

going down market. These lenders should be encouraged through technical assistance and

training to apply more modern concepts. Some larger lenders have developed partnerships withUS subprime mortgage lenders to acquire this knowledge.

3.2.7 Eliminating the KPR Subsidy System and Establishing an Alternative Role for BTN

Mainstream banks and other lenders are not likely to lend down market until the KPR subsidy

program is replaced with a market-friendly subsidy approach and until the future of BTN is

clarified and they can be assured of a level playing field in this segment of the market.

3.3 Long-term Funding for Mortgage Finance

After the primary mortgage market has improved risk assessment and management methods and

the efficiency of its operations, long-term investors may become interested in providing funds for

the expansion of the mortgage market. Both mortgage bankers and the government of

Indonesia, have discussed accessing long-term funds from pension funds or insurance

companies directly or through capital markets as a panacea for expanding mortgage lending.

However, it is extremely unlikely for long-term investors to show an interest in the mortgage

sector before risk issues are better dealt with. Similarly, it would not be prudent for government

to facilitate or participate in accessing second tier mortgage funding before addressing policy and

regulatory inefficiencies in the primary mortgage market. Having said that, we discuss alternative

ways to obtain long-term second-tier funding for mortgage lending, while addressing different

types of risk in the primary market.

11State banks, including the regional banks discussed here, are currently represented by HIMBARA.

HIMBARA will soon be merged with Perbanas.


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3.3.1 Different models to access long-term funds

Indonesia has long discussed the option of developing a secondary mortgage facility12

(SMF) or a

secondary mortgage market13

(SMM), in order to deal with liquidity and term mismatch issues in

mortgage lending. These two types of systems to access capital markets can take several

specific forms and are by no means the only way to obtain long-term funding for mortgages. For

example, individual banks can issue their own bonds against their mortgage pools (the European

system) and BTN has already done this. Banks can also try to obtain long-term funding without

going to the capital market. For example, they can engage directly in wholesale mortgage loan

transactions with other banks or arrange for loans from long-term investors, such as pension

funds, using the mortgages as collateral. With shallow capital markets or capital markets

dominated by government securities, as in Indonesia, alternative funding structures may be more

attractive.

Capital market funding of mortgage portfolios can address other issues apart f rom long/mediumterm resource mobilization. For example, a true secondary mortgage market removes the

mortgages from the balance sheet of the bank and, therefore, eliminates interest rate riskfor the

bank. It also provides capital reliefsince the bank no longer carries the mortgages on its books.

None of the other resource mobilization strategies have those advantages. Irrespective of the

type, secondary mortgage transactions provide incentives for improving the quality and

standardization of mortgage loans in the primary market.

The need for and choice of a secondary mortgage strategy for Indonesia, depends on the

constraints that need to be addressed in the primary market. Certainly, there will be a need for

increased funding as the housing finance sector recovers. However, the assumption that banks

are not now engaging in scale mortgages lending because of liquidity constraints is a misleading

and over-simplified description of the current situation. At the present time, lack of liquidity is not

the major issues preventing a surge in mortgage lending, but term-mismatch is. Banks do not

make mortgage loans, because they do not have access to medium to long term funds. Banks

are also extremely risk averse, and a more complete recovery from the crisis and further

strengthening of the primary market, in particular the assessment and management of credit risk,

are both necessary. However, capital market access or other ways to access long-term funds

remains an appropriate goal for the medium term. HOMI makes the following recommendations

for a long-term funding strategy for Indonesia:

12On-balance-sheet funding of mortgages by an SMF, which in turn may issue bonds in the capital market.

13The purchase of mortgage loans without recourse by an entity (mostly a conduit), which can issues securities against

the mortgage pools.


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3.3.2 Initiating steps to facilitate accessing funds from long-term investors either

directly or through a secondary mortgage facility:

The Inter-Ministerial Committee should designate a Working Group under the

Finance Subcommittee to facilitate ways for pension-funds, insurance companies and

other institutional investors to make loans to mortgage lenders, possibly through the

creation of a refinancing facility orSMF. An institutional champion for this effort

should be agreed upon as soon as possible. We suggest that the Working Group be

headed by Bappenas, with members including MOF, Kimpraswil, BI, and the

Department of Justice.

MOF should assess the regulatory changes required to allow insurance companies

and pension funds to engage in long-term second tier mortgage funding (e.g., allow a

larger proportion of investments in financial real estate assets).

Nearly all current mortgage portfolios are relatively new. The new, post-crisis

portfolios will likely be the assets used for an SMF. These portfolios must be furtherseasoned before their characteristics can be fully understood by analysts. The

Working Group should provide assistance for development of a database for analysis

of the mortgage portfolio characteristics, perhaps centered in Perbanas (see above).

3.3.3 Commissioning a feasibility study of alternative refinancing structures and their

regulatory and market requirements.

A thorough assessment for a possible refinancing mechanism or SMF proposal should be

undertaken. Such a study should include; the ownership structure, prudential regime and

supervision and any special provisions necessary to facilitate the competitiveness of the SMF

debt instruments in the capital market. A feasibility study should further include the following

issues:

Potential investors and the types of loans/bonds they might invest in,

Comparative costs of raising funds for mortgage lending via an SMF as compared with

other options open to the banks,

Characteristics of the newly developing mortgage portfolio, including NPLs, will need to

be undertaken to help ensure the success of an SMF.

Type of government participation in the inception and the development of long-term

capital instruments. If an SMF model is to be followed, we suggest that Indonesia

examine the features of two of the most successful liquidity facilities worldwide

Cagamas, the Malyesian mortgage facility14

, and the Federal Home Loan Bank system in

the USA. An earlier proposal for an Indonesian SMF by Michael Lea and Alex Pollock

14Cagamas was incorporated in 1986, following discussions among the Central Bank, Malaysian financial institutions,and a consultant from a U.S. financial institution. Cagamas commenced operations in 1987.


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included a minority (10 percent) participation of the government, but with a sunset clause.

This model may be revisited.

HOMIs recommendations are that Indonesia avoids a non-market refinancing mechanism and/or

special requirements such as mandatory investments in low income housing and below-market

interest rates, such as those in effect for Malaysias Cagamas. A market-based approach to

mortgage finance is especially important for Indonesias banks to shed the legacy of the KPR

subsidy system.

3.3.4 Long-term Options: Development of SMM and Securitization Tools

A true secondary mortgage market conduit, which buys the mortgages from the primary lender

and issues securities against polls of acquired mortgages, has far more complex demands than

an SMF. It may not be necessary in Indonesia and will in any case be feasible only in the much

longer-term. However, some steps may be taken to facilitate off-balance-sheet funding, including

securitization, in the future: Have the SMF, after a period of successful refinancing of mortgages, examine the option

for lending with little or no recourse. Malaysias Cagamas is currently experimenting with

non-recourse lending. Its experience may be useful for Indonesia to follow.

A Subcommittee Working Group on Secondary Markets should continue to develop the

legal and administrative infrastructure for securitization. Development of an SMM would

require addressing a number of legal and regulatory issues, including the trust concept,

bankruptcy remote, and mortgage registration in accordance with sales of securities.

Efforts in developing the legal infrastructure for securitization have been underway since

1999.

3.4 Developing Low Income Housing Finance

While microfinance is widely available in Indonesia, although to a more limited degree in rural

areas, it could benefit from a more focused approach on microfinance for housing (MFH). MFH is

not a panacea for the low income housing sector but it can become a significant stand-alone tool

for loans for home improvement, home expansion, including for development of rental rooms, and

for new construction conducted on an incremental basis.


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3.4.1 Strengthening the Technical and Commercial Base of Microfinance Institutions:

Technical skills in the microfinance sector are often low, and credit programs offered by the

existing network of MFIs are mostly not undertaken in a commercially viable way. For example

lending rates are not based on real cost of lending. This weakens the sector and makes its

expansion into housing lending problematic. We recommend several actions to strengthen the

sector:

Investigating a capacity building role for the micro-finance network (GEMA PKM) or the

soon to be develop training center discussed by CGAP, GTZ, AusAid, in expanding a

MFH Network. These institutions, possibly with assistance from BRI, could help promote

MFH as an explicit component of microfinance and assist in developing MFH loan

products and underwriting policies. The networks of Bukopin, the Cooperatives, the

BPD, the LKPD, and so forth, should be assessed under an expansion effort.

GOI and donor programs should move away from providing subsidized credit to MFIs that

will be on-lent with subsidized rates to borrowers. Subsidies to borrowers can beprovided in other ways (varied supply and demand type subsidies) as can subsidies to

the MFI sector (e.g., technical training for MFIs). In sum, care should be taken not to

allow subsidized credit programs to crowd out strengthening of commercially based

microfinance institutions.

3.4.2 Developing a Range of MFH Loan Products

One key issue is whether to design and introduce loan products more specifically to support

MFH. Some of the issues include:

Whether the housing loans should be somewhat larger and longer term than the micro-

enterprise loans.

Whether underwriting and collateral should be linked to prior savings programs, as an

approach to self-insurance.

How to increase lending for private sector rental housing. Rental housing for low income

households is a priority. Private sector, low income rental accommodations in owner-

occupied housing is one way to alleviate this pressure. BRI already lends to

homeowners for the purpose of building additions to their dwelling to be used for rental.

BRI could assist other MFIs to develop rental housing loan products.

3.4.3 Integrating Microfinance Projects into Microfinance Systems

Housing project-based micro-finance, while useful, is often tied to unstable MFIs. Credit is not

provided on a commercial basis, but is considered part of the housing project and the

participating MFI institutions and their credit policies remain weak. Cobild, a donor funded

community-based MFH system operated through Kimraswil, is a case in point. Clearly, valuable


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lessons are being learned from the Cobild project concerning community-based endeavors,

affordable building technologies, and so forth. But the credit aspects of the program are bringing

the wrong message to those who wish to strengthen the institutional structure of MFIs and

provide commercially based credit. Cobild and similar institutions could focus their role on

integrating the credit component of housing projects into the formal financial sector by:

Using civic groups only as transaction intermediaries with formal sector lenders.

Using group loans as one of the criteria in underwriting for commercial loans. If a

household successfully completes this loan, it could receive a certificate for a

follow-on individual loan with an MFI.

3.4.4 Funding MFIs

Constraints posed by access to adequate funds for MFH will need to be addressed, particularly if

housing loans will become part of the lending menu. Establishing a liquidity fund for MFIs may be

one option. At the same time, Indonesias network of low income lenders is well positioned toenhance savings generation. New funding solutions should not discourage a certain class of

MFIs to raise funds through savings deposits. However, this will require improved regulations

and supervision of MFIs. The World Bank is working with the GOI on this issue. In addition, the

World Bank Pilot Project on Microfinance is considering the development of a liquidity fund to

support housing micro-lenders. Efforts by Kimpraswil to expand housing lending down-market

should be coordinated with this pilot.

3.5 Strengthening the Regulatory EnvironmentCommercial real estate lending is risky and cyclical and is often the cause of bank failures. For

these reasons, a countrys regulatory agencies should adopt parameters and supervisory

procedures that are explicitly responsive to risks inherent in mortgage finance. Indonesia is in the

midst of important new development in regulation and supervision. A new supervisory institution,

the Financial Supervisory Authority (OJK), and the Integrated Financial Supervisory Institution

(IFSI) would assume all supervisory functions, leaving BI with the regulatory function for banks.

HOMI suggests that the following regulatory issues related to real estate finance be considered:

3.5.1 Improving BIs supervisory reports for real estate finance15

Recently BI changed its reporting requirements such that mortgage loans (KPR) are no longer

reported separately from consumer lending. This decision ought to be reversed and call reports

ought to differentiate real estate lending from other lending.

15See William Handorf, The Regulation and Supervision of Housing Finance.


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Particular attention should be given to trends in developer and construction credit, which are

sensitive to the cyclical nature of real estate. The quarterly review of underwriting trends needs

to closely watch changes in this type of lending. The lenders require more prudent underwriting

methods (see below), reliable information systems and proper provisioning. Consumers need

protection against developers financial distress.

3.5.2 Reviewing regulatory risk weights for mortgage loans

When residential lending picks up and an assessment can be made of mortgage portfolio

performance, the currently stringent reserve (mortgages have a 100 percent risk weighting) and

other guidelines (LTV ratios, Income to Payment/Debt ratios) for residential lending should be

reviewed.

3.5.3 Closer monitoring of appraisal methods

The banks seem to have neither a uniform approach to appraisal, nor a sufficiently stringentapproach to the rules and regulations that encourage independent and professional valuations.

Self-regulation by the appraisal industry appears to be inadequate. Closer monitoring of the

appraisal methods used by the banks is critically important. While HOMI has not done a separate

study of the appraisal industry, it is recommended that this be carried out.

3.5.4 Improving supervision, monitoring and regulation of micro-finance and

cooperative financial institutions

Currently, most non-bank micro-finance institutions are poorly, or not at all, monitored or

supervised. Indeed, there is confusion about the responsibility for supervision of this financial

sector between the Ministry of Cooperatives, BI and MOF. Data collection on the sector is

haphazard and incomplete and scattered amongst different agencies. The regulatory system, for

both micro-finance and cooperative financial institutions is equally unclear and unsupportive of a

healthy growth of the sector. HOMI recommends a complete review and strengthening of the

supervision and regulation of micro-finance and cooperative financial institutions located in BI or

MOF. Such an effort should be linked to the provision of technical assistance and liquidity

funding for the sector, described in the previous section.


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4.0 FACILITATING SPEEDY RELEASE OF SERVICED LAND

4.1 Main Issues Constraining Land Supply

A well functioning housing system requires access to sufficient serviced land at a fair price. Therehave been several recent positive changes to land administration regulations and practices and to

the land titling system. Nevertheless, several important constraints remain to the efficient

functioning of the land market for housing: unnecessary complex and costly titling of land,

inappropriate regulation, severely constrained supply of land because land is being held out of

development by a variety of agencies (e.g., IBRA) and as a result of the permitting system, and

the incomplete decentralization of land administration functions. There are several positive

actions by which the Government can make the housing market more efficient. We make the

following recommendations. Most will require inter-ministerial coordination.

Improving the Efficiency in Land Titling and Registration

Facilitating the Supply of Land and Improving the Permitting Process

Completion of the Decentralization of Land Administration

4.2 Improving the Efficiency of Land Titling and Registration

4.2.1 Facilitating Land Titling

Although progress has been made in a number of areas, land titling issues remain a key

stumbling block in the efficient delivery of land. The entire process of granting a location permit,

submitting the land rights application, granting of land title, registration, and registration receipt is

time-consuming. The land rights application is submitted to the land office in the Kab/Kotamadya,

granting of land title is done by a BPN office, either regional, provincial, or national, and

registration and issuance of the registration certificate is done at the land office in the

Kab/Katamadya. The following recommendations are made in order to simplify the process:

Granting of land title be executed by Land Office in Kab/Region if the location is within

the area of Level II Local Government (Kab/Kotamadya);

If the location is within several Level II Local Governments, granting of land title is issued

by the Governor upon the local governments recommendations; and

The national BPN office should become largely a policy-making body, setting up the

guidelines and policy implementation strategies. Granting of title is delegated to Level II

Local Government with the exception of land located within several local governments.


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4.2.2 Facilitating the transfer of a Hak Milik title to individuals

One major issue of land titling is the long period required to provide a purchaser of a house from

a developer (holding a Hak Gunabaguna (HGB) title to the entire developed area) with a

mortgageable title (Hak Milikor an individual HGB). We recommend that:

BPN takes no action to prevent developers from initially splitting the title to the benefit of

fictitious individuals; and,

The Minister of Home Affairs be asked to declare housing developers as permitted

corporations under the Basic Agrarian Law, and thus allow them to hold Hak Milik in

place of HGB rights.

4.2.3 Facilitating the conversion of Hak Girik to Hak Milik titles

This process is currently costly (both in fees and informal payments), especially for lower income

households. For this reason, many households choose not to make the conversion, which unduly

limits their access to formal sector housing finance, as many lenders will not accept HG title ascollateral. A recent pilot program has shown that it is possible to reduce the costs of converting

HG to HM, and these findings should be implemented more broadly.

4.2.4 Improving the quality of the land title

There are a number of issues relating to land title that make residential mortgages unduly risky,

time-consuming and, therefore, expensive. Titles are uncertain, because of latent claims,

fraudulent practices, and unpredictability of court decisions. These issues hinder the efficiency of

mortgage lending and impede the development of mortgage insurance and secondary mortgage

markets. Most of these issues can and should be addressed by the proposed Land Management

and Policy Development Program, to be supported by the World Bank and the revised Basic

Agrarian Law.

Improving Title Registration: A land registration system serves to record land titles and

interests for public record. It serves as a basis for land trading and credit security. Unregistered

land is not acceptable security for bank loans. In Indonesia, like in many other countries, the

registration system does not guarantee the title, but merely provides evidence of it. Recent

improvements have been made in registration procedures. Indeed, improvements in titling and

permitting procedures are now relatively more important in increasing efficiency and land supply.

However, many individuals still do not register their titles because of relatively high fees and lack

of transparency of procedures. Several recommendations to improve registration follow:

Land registration can be made more effective by revising PP 24/1997 to achieve:

o Simplification of standardized forms of title evidence, Deed of Mortgage, and

Sales Purchase Deed. If the APHT is registered or the Mortgage Certificate is


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simplified into just 1 sheet, it will not be necessary to provide a registration

receipt for a mortgage.

o Enforcing the requirement that registration be undertaken within seven days.

o Strengthening enforcement powers of the PPAT to improve compliance with

existing requirements.

We recommend that BPN, together with the Ministry of Home Affairs (Dalam Negeri) where

relevant, should report on the feasibility of these reforms.

4.2.5 Allowing Non-Registered Properties as Credit Collateral

The Land Administration Project of the World Bank has detailed several ways that would allow

householders to raise credit on unregistered parcels. We support those recommendations.

4.3 Facilitating the Supply of Land and Improving the Permitting Process

Currently high costs are incurred and excessive time is spent by the private sector, includingindividual households, to obtain development, subdivision, planning and building permits. The

bureaucracy is structured so as to connive at hidden charges. Restrictive regulations and

complex and costly procedures can severely limit the availability of land and increase its price.

These increased costs are passed onto the consumer. HOMI makes several recommendations

to lower these costs and improve the supply of land to the market.

4.3.1 Facilitating Release of Land to the Market

The land supply is more constrained than need be, especially for low income housing. Most of

the land that could be developed for housing around Jakarta and, maybe, around other major

cities, is notlegally available. Holders of large tracts of idle land are: IBRA, developers, local

government, Perum Perumnas, the Military, large manufacturers and industrial estates. In

addition there are many holders of small vacant plots. Because this idle land does not form part

of the supply of land for new housing, it may be expected thatall other things being equalthe

price of land is significantly higher than might otherwise be the case, and helps to keep house

prices high. Holding land out of development is also contrary to the spirit of Indonesian law. We

therefore make some recommendations for stimulating the supply of land. These include:

Land held by IBRAshould be sold by open and transparent auction, without restriction

on the type of bidder, and within the time frames agreed within government and with the

international community. Insofar as it may be possible to disaggregate some of the

holdings into smaller parcels, this would be preferred. However, existing, time-expired

Location Permits should not automatically be transferred to new purchasers.

Other proposals to dispose of IBRA land through transfers to local government or a new

land bank to secure funding for a liquidity facility, are not supported by the HOMI team.


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Refinancing of mortgage loans should be done by regular and long-term market investors

to discipline and strengthen the sector, and not by closed non market-based special

circuits.

Public Sector Holdings. A sub-committee or task force working under the Inter-

Ministerial committee should, together with Perum Perumnas, DKI Jakarta and other local

governments, the military and perhaps, BPN, and other public land holders:

o Review the land needs of each agency, and subsequently auction any land

surplus to these needs.

o Review the Location Permits on these lands and revoke the permits where

appropriate in the same way as for private holdings.

Private Land Banks: Large developers may hold very large tracts of land. It would be

logical for developers to develop first the land they own, before buying the residual land

under location permit. It would be both in the public interest and in the longer term

interest of the developers, if government took a lead in increasing the supply of land witha view to driving prices down. We recommend to increase the supply as follows:

o Review and revoke unused Location Permits (See Section below).

o Change the Land and Building Tax(PBB) to allow higher PBB charge on idle

land, to encourage corporations and individuals with small holdings to release or

develop it. The committee currently examining changes to the PBB law should

promote this change.

Local governments to take the lead in reviewing land availability, especially for new

lower-income housing, with a view to assembling and promoting development packages.

It will be necessary to acquire outside, impartial, expertise to assist local governments to

plan negotiate and, perhaps, implement land packaging in this form. Foreign donors

would be receptive to financing advisory services of this nature, perhaps through one of

the associations of local governments.

Pro-active provision of infrastructure. A precondition for the development of land for

housing is the availability of on-site infrastructure. However, provision of infrastructure

often follows the unauthorized development of houses and there are currently severe

funding shortfalls for infrastructure provision. The more pressing issue, therefore, is one

of servicing informal housing areas. We believe it is appropriate for local governments to

use the proposed National Housing Fund resources to complement other KIP-type

funding sources. In addition, the revenues generated by improved land management, for

example, increased land releases by public bodies, tax on frozen land (see below), can

be channeled into the servicing of additional land.


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4.3.2 Lowering the cost of regulation

Interestingly, in Indonesia, the actual standards required for subdivision, planning and building

are not the main constraint in developing low and moderate income housing. Rather, the formal

and informal fees related to acquiring the necessary development permits and the interest cost

over the period required to receive the permits are exceedingly high --in the order of 16 percent of

project costs. This figure excludes the cost of restricting the supply of land discussed above.

Although regulations have been issued regarding the maximum time to be taken by officials in

completing certain processes, these regulations are often not observed. The time and the cost of

obtaining permits therefore continue to be much higher than is officially allowed. We recommend

the following improvements:

Ministry of Home Affairs taking a lead in assisting local governments to draft decrees

simplifying approval processes.

Disseminating the lessons learned from the land office in Jakarta Barat, which has

simplified the regulatory system and provided developer incentives for low-cost housingconstruction.

4.3.3 Revision of the Location Permit System

Amongst all the development regulations, the Location Permit is considered the most detrimental

to encouraging a regular supply of developable land. Two characteristics of the Location Permit

are important for this discussion. Firstly, grant of a Permit has been seen as conferring exclusive

rights of acquisition on the developer holding the permit, but without requiring him to acquire the

land. The system makes it difficult for land owners to sell their land to a third party; reduces

incentives to put land to the most economic use; and is potentially environmentally-damaging,

since environmental issues generally take second place to pecuniary considerations. Secondly,

Location Permits are normally valid only for a limited period of timeone to three years,

depending on the area of land involved. A permit could be renewed for one additional year if the

developer could justify its extension (such as by demonstrating good faith in acquiring at least 50

percent of the land designated in the Permit). However, the Izin Lokasilegislation states that if all

of the land has not been acquired within the specified period, the permit should be legally revoked

for implementation of the regional plan, or to be released to other entities. This regulation is,

however, not enforced and developers often fail to develop, or even to purchase the land. Land

is held for speculation and land banking and monopolistic situations are created.

BPN issued a clarifying regulation in 1999 (Circular No. 2/1999). This re-stated certain

parameters, including the maximum amount of residential land holdings permitted to development

companies, and the length of time for which a permit is valid. It also stated that the grant of a

Location Permit does not covey an exclusive right to the holder of the permit; it merely permits the


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holder to negotiate acquisition with the affected landowners. This means that a landowner may

choose not to sell, in which case the land isin theoryavailable for other developers. Nothing

in the legislation prevents the sale of land to third parties. This provision is not widely known

however. HOMI has the following recommendations to improve efficiency, stimulate enforcement

and provide education about the system:

Efficiency:

Reducing the time taken to obtain Location Permits by limiting the number of members of

the coordinating review committee.

Requiring that all local governments set up a simple system for monitoring compliance

with residential Location Permits. A central body would be needed to assist them in

establishing and maintaining the system.

Reducing the complexity of the process by:

o Reducing the number of steps needed for approval of the Location Permit

(establish a fast-track model for approving permits);o Re-calculating a more realistic maximum period for the issuance of a new Permit;

o Consolidating all fee payments within an acceptable formula;

o Making these regulations transparent, by publishing them widely; and

o Establishing an appeals procedure.

Enforcement:

Invoking the provisions of PP 36/1998 to encourage developers holding land under

Location Permits, in excess of their immediate needs, to donate the surplus amounts to

government for use for public projects in exchange for renewal of the residual Permits.

All other Location Permits for land not required for development in the near term should

be revoked if not used.

Education:

Educating all affected landowners on the implications of the issue of a Location Permit

covering their land. This could be tasked to the local land offices.

Requiring that local land offices should clarify the status Inpres No. 23/1998 to

developers, which revokes the need to obtain an Izin Prinsip.

In the context of increasing local autonomy, local governments can and should determine

how to reduce and simplify the approval process. This would be done by issuance of a

Regional Government Regulation (PERDA/Mayors Decree).

The resolution of many of these topics will be addressed by the World Bank-funded Land

Management and Policy Development Program. The success of this program should be

regarded as a very high priority for the success of a national housing policy


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4.3.4 Adjustment of the Mixed Income Housing and 1/3/6 Rule

The 1-3-6 rule was introduced by central government in 1974 and was reformulated in 1992. It

requires (private) developers to build 6 units of simple housing and 3 units of mid-standard

housing, to every 1 unit of luxury housing constructed. This requirement is customarily included

as a condition of the Location Permit. However, the 1-3-6 rule is formulated vaguely and it is

easy to circumvent. Its implementation is rarely monitored. Apart from lack of enforcement, there

is a principal weakness in the concept. Effective demand is higher for one-class neighborhoods

and these are therefore preferred by developers. Nevertheless, this is insufficient reason to

abandon the mixed development concept, which is in line with the constitution of the country.

Several alternative approaches could be adopted.

Improving the workings of the current 1-3-6 regulation:

o Implementation responsibility must be taken by local governments

o Developers must be required to observe the regulation within the planning

jurisdiction that issued the permit.o The current principle of mixed development could be integrated in the zoning

regulations.

Encouraging the local sale of certificates of completion, a device which would permit

developers to claim virtual compliance with the regulation. Thus, for example, a

developer specializing in low cost housing could sell a certain number of certificates of

completion of low cost housing to another developer. In possession of the certificates,

the latter would then be able to obtain a permit for high cost housing. This would require

careful monitoring to be in place to make sure that the same certificates are not sold

repeatedly.

4.4 Completion of the Decentralization of Land Administration

KEPRES 95/2000 effectively abolished BPNs administrative authority over local land offices. The

administration of local land policy was to fall under the mandate of local government. Because of

concerns about a lack of capacity at the local level, a Presidential Decrees 10 and 60/2001 was

issued to delay a full transfer of responsibilities for two years. Several recommendations by the

COMO Consulting Project, deal with this issue, and we fully support those.

Providing donor assistance which aims to develop and disseminate examples of goodpractice in local land offices:

o providing examples to be emulated not just by upgrading hardware, providing

training or streamlining structures, but by setting examples for a systematic

process of change;


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o strengthening horizontal exchange on Good Practice, e.g. via workshops, and

the establishment of a network, including a web site, that facilitates horizontal

exchange among the Kantor Pertanahan Kabupaten/Kota;

o strengthening the service delivery capacity of BPN Pusat for supporting the

regions.

Introducing a Quality Management system throughout the local land offices.

Strengthening local capacity for land administration. Considerable capacity building for

staff of local offices, under the new, decentralized environment will be necessary over

coming years. This, indeed, is to be a focus of the proposed World Bank-funded Land

Management and Policy Development Program (LMPDP). The success of LMPDP, and

of any successor program of capacity building, is critical to the success of many of the

recommendations on land made in this HOMI report. We recommend that it should be

given full support by all relevant agencies and donors.


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5.0 PROVIDING HOUSING ASSISTANCE

5.1 The Demise of the Old Subsidy ProgramsGOIs housing programs are in disarray. The G

Documents

IMPLEMENTING INDONESIA’S NEW HOUSING POLICY:THE WAY FORWARD. Draft