What Can Investors Learn from Jakarta's Land Reclamation Project?

Several years ago the Indonesian government presented the National Capital Integrated Coastal Development (NCICD) masterplan, better known as the Giant Sea Wall, located in the bay just north of Jakarta. This project is based on the construction of a giant sea wall that will protect the capital city against floods originating from the sea (the wall includes large lagoons that create a buffer to outflows from the 13 rivers in Jakarta; basically a giant pumping reservoir). Although the groundbreaking ceremony for this mega-project was conducted in October 2014, there are still studies being conducted (in cooperation with experts from the Netherlands and South Korea) about the project's achievability.

Meanwhile, in the space (sea water) between the giant sea wall and the land there was room for massive urban development through land reclamation. By establishing 17 artificial islands in the Jakarta bay there would be room for property development (apartments and office towers, shopping malls, hospitals, landed houses etc), parks and beaches as well as (other) infrastructure.

While the giant sea wall is the project of the central government, the land reclamation projects falls under the authority of the local Jakarta administration, while private investors were invited to develop (most) of the projects on the artificial islands. Over the past two years the foundations of three artificial islands have already been laid and are visible from the mainland.

However, in April 2016 Indonesian President Joko Widodo suspended all activities related to the ambitious project due to alleged violations of - and/or hiatuses in - Indonesian law. Moreover, a corruption scandal emerged involving one of the developers of the land reclamation project (property developer Agung Podomoro Land that is listed on the Indonesia Stock Exchange) and a local Jakarta legislator (Muhammad Sanusi). Former Agung Podomoro Land General Director Ariesman Widjaja was eventually sentenced to three years in prison and an IDR 200 million fine (or three additional months imprisonment) by the Jakarta Corruption Court as he was found guilty of bribing Sanusi in a bid to influence the outcome of deliberations on two draft bills with regard to Jakarta's Zoning Plan and Coastal Northern Territory (RZWP3K) for the period 2015-2035 and the North Jakarta Strategic Area Regional Spatial Plan. Agung Podomoro Land's subsidiary Muara Wisesa Samudra had earlier been awarded the rights to develop Islet G, a big residential and commercial property project called Pluit City.

More alarming for investors and consumers was that promotional activities and sales of property on these artificial islands were already ongoing. The Indonesian Consumer Protection Foundation (YLKI) therefore immediately urged people not to buy property on these islands because the property developers engaged in Jakarta's land reclamation project had only obtained principal permits from Jakarta's city administration. However, other permits are yet to be issued (a land reclamation permit, a permit allowing the use of reclaimed land, and a building construction permit).

Now, about one year later, dark clouds are hanging over the future of the 17 artificial islands considering Baswedan will become the next Jakarta governor. Baswedan is against the project because it disturbs the welfare of local fishermen and it damages the environment. Regarding the three islands of which the foundations have already been established, Baswedan said he wants to use them for the rehabilitation of the environment or for infrastructure (but not for commercial purposes). The local Jakarta administration already expressed its plan to conduct an audit into the potential of the three islands. It seems highly likely the 14 remaining islands will not be built at all.

This whole case gives a couple of insights into the structural weakness of Indonesia's investment climate. Firstly, with the change of a (local) government a big project can suddenly be scrapped even though private investors already invested millions of US dollars to establish the infrastructure (Baswedan did say that he also seeks a good solution for these private investors). This explains why investors are always hesitant to engage in big projects in Indonesia (that require support from authorities) shortly before an election.

Secondly, Indonesian law was not prepared to deal with the project. The following violations were detected:

1. The issuance of land reclamation permits without a Zoning Plan for Coastal Areas and Small Islands (RZWP-3-K) and/or Spatial Plan (RTRW) in line with Article 30 of Law No. 1/2014 on Management of Coastal Areas and Small Islands
2. The issuance of permits without continuous communication with relevant ministries (hence violating Indonesian Law No. 1/2014
3. Land reclamation permits cannot be issued only based on a Spatial Plan (RTRW) but have to be based on a Zoning Plan for Coastal Areas and Small Islands (RZWP-3-K). However, regarding the RZWP-3-K the local Jakarta administration is yet to issue local regulations
4. Based on the revocation of Presidential Decree 52/1995 (through Presidential Regulation No. 54/2008), the local Jakarta administration lacks basis to issue reclamation permits
5. The issued land reclamation permits are not based on a strategic environmental assessment in line with Law No. 32/2009 on the Management and Protection of the Environment
6. The issuance of reclamation permits by the Jakarta Governor - in conflict with Presidential Regulation No. 26/2008 on the National Spatial Plan that lists Jakarta as a National Strategic Area (Kawasan Strategis Nasional). Only the central government has the authority to manage and utilize these areas
7. The issuance of reclamation permits were not based on Minister of the Environment Decree No. 14/2013 on the Ineligibility of Reclamation

Obviously, land reclamation is something new to Indonesia and therefore markedly differs from "ordinary" investment projects in Indonesia. Therefore, Indonesian legislators should have accurately checked - and if necessary improved - the legal context. Indonesian law was not ready to deal with this project. Private developers (who already invested in the project) and consumers (those who already bought property) have become the victims of weak governance.

Thirdly, a corruption case was detected as described above. Although Indonesia's anti-corruption watchdog (KPK) has detected many corruption cases over the past decade related to investment projects (resulting in prison sentences of high profile figures such as former ministers and directors of private companies), some say these cases are merely the tip of the iceberg and most remain undetected.

Lastly, consumers are usually the victim in Indonesia, not only victim of legislators/politicians' greed or unprofessionalism but are also the victim of corporate greed of unprofessionalism. In this case property developers were already selling property units on the artificial island to consumers (and investors), while these developers had not even obtained all necessary permits for the construction of the property.

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