A Roadmap for Housing Policy Reform

January 2015

A ROADMAP FOR HOUSING POLICY REFORMIndonesia

A ROADMAP FOR HOUSING POLICY REFORM

Indonesia

January 2015

Indonesia | Roadmap for Housing Policy Reformii

Acknowledgments

This report was produced with advisory from the World Bank and fi nancial support provided by

the FIRST Initiative and the Australian Department of Foreign Affairs and Trade via the Indonesia

Infrastructure Support Trust Fund. It has been prepared for the Government of Indonesia, in

collaboration with Bappenas, Directorates of Housing and Settlements and of Land and Spatial

Planning, and the Ministry of Public Works and Housing.

The recommendations put forward in this report originated from a consultative planning process,

supported by Focus Group Discussions held by Bappenas and the Ministry of Public Works

and Housing, stakeholder forums, one-on-one meetings and regular inputs by the Core Team

for Housing Policy Reform and the Inter-Ministerial Working Group for Housing and Settlements

(Pokja PKP). Technical fi ndings and policy recommendations also benefi ted from the input from a

large team of international and national housing experts.

We are grateful to all the government counterparts and stakeholders who participated in this

process. In particular, we would like to express our special gratitude to the following individuals

whose facilitation and guidance has been essential to the development of the Roadmap:

Mr. Dedy Supriadi Priatna, Director Minister for Infrastructure, Bappenas

Mr. Nugroho Tri Utomo, Director of Housing and Settlements, Bappenas

Mr. Oswar Mungkasa, Director of Land and Spatial Planning, Bappenas

Mr. Hardi Simamora, Head of Bureau of Planning and Budgeting, Ministry of Housing

While the comments and inputs to the proposed Roadmap have come from many contributors,

all shortcomings of the work rest solely with the authors.

iii

Contributors

Government of Indonesia

Bappenas, Directorate of Housing and SettlementsNugroho Tri Utomo, Housing and Settlements Director

Hari Kristijo, Head of Housing Development Subdivision

Nurul Wajah Mujahid, Planning Staff

Rizqi Luthfi ana Khairu Nisa, Supporting Staff

Tiara Anggita, Supporting Staff

Sheny Diah Puspita, Planning Staff

Bappenas, Directorate of Land and Spatial PlanningOswar Mungkasa, Land and Spatial Planning Director

Uke Moh Hussein, Head of Land Sub-Directorate

Gita Nurrahmi, Supporting Staff

Ministry of Public Works and HousingNostra Tarigan, Head of Program Division, Planning Bureau

Rochdianto, Head of Self help Housing Strategy, Self Help

Housing Deputy

Merlina Rubiyati, Head of Formal Housing Strategy, Formal

Housing Strategy Deputy

Haryo Bekti, Head of Program and Budgeting, Housing

Finance Deputy

Diah Parahita, Head of Foreign Cooperation Administration

Sub-Division, Bureau of Planning and Budget

Rika Revireza, Supporting Staff

The World Bank

WB Team LeadsTaimur Samad, Task Team Leader, Sr. Urban Economist,

GSURR

Rumana Huque, Co-Task Team Leader, Sr. Urban

Specialist, GSURR

Josephine McVitty, Urban Specialist, GSURR

National ContributorsDodo Juliman Widianto, Incremental Housing Specialist

Mahditia Paramita, Rental Housing Policy Specialist

Miya Irawati, Urban Land Policy Specialist

Adhitya Wirayasa, Urban Land Policy Analyst

Ruslan Prijadi, Housing Finance Specialist

Anindiaztuti Rachmadani, Housing Finance Analyst

Budi Prayitno, Housing Sector Governance Specialist

Wied Winaktoe, Housing Sector Governance Analyst

International ContributorsAndrey Milyutin, Sr. Housing Finance Specialist, GFMDR

Victor Mints, Operations Offi cer, GFMDR

Olivier Hassler, Sr. Housing Finance Specialist

Dao Harrison, Housing Policy Specialist

Duong Huynh, Housing Policy Analyst

Deidre Schmidt, Public Housing Policy Specialist

Matthias Nohn, Incremental Housing Policy Specialist

Geoffrey Payne, Sr. Urban Land Policy Specialist

Raven Anderson, Urban Development Analyst, GSURR

Indonesia | Roadmap for Housing Policy Reformiv

Contents

Acknowledgments ii

Contributors iii

Government of Indonesia iii

Chapter 1 Key Messages of the Roadmap 1

Chapter 2 Objectives of the Roadmap 3

Chapter 3 Why Indonesia Needs Housing Policy Reform 7

Chapter 4 Strategic Framework for Housing Policy Reform 17

Chapter 5 Targets and Budgets 21

Chapter 6 Description of Policy Actions 25

1. Develop a Comprehensive Slum Upgrading Program 26

2. Reformulate the Approach to Formal Subsidized Housing

29

3. Redesign Support to Home Improvement 34

4. Enable the Affordable Formal Housing Market 37

5. Build Robust Delivery Systems 43

6. Mobilize Urban Land for Settlements 49

Chapter 7 Roadmap Implementation 53

Annexes 59

1. Principles of Housing Policy Reform 59

2. Target Population an Affordability 61

3. Background to Housing and Settlements Policy 74

4. Sector-Specifi c Context 78

4.1 Housing Sector Governance 78

4.2 Slums and Settlements 90

4.3 Urban Land Policy 100

4.4. Home Improvement and Incremental Expansion 109

v v

List of Figures

Figure 1. Estimated Housing Affordability in Indonesia in Market Conditions* 9

Figure 2. Total Budget Allocation to Programs by Ministry of Housing,

2011-2014 (tr. IDR) 10

Figure 3. Number of Substandard Housing Units by Decile 12

Figure 4. Goals, Policy Solutions and Scenarios 19

List of Annexes Figures

Figure 1. Household Ownership Rate per Decile. 62

Figure 2. Number of Housing Units with Various Substandard Characteristics 63

Figure 3. Ten Year Growth Trends in Indonesia (2004 – 2013) 65

Figure 4. Average Monthly Household Expenditures, by Decile and by Geography 67

Figure 5. Estimated Level of Affordability of Units for Main Household Segments 70

Figure 6. Flow of Funding for MPWH Programs 82

Figure 7. Sources of Local Housing Program Funding 83

Figure 8. Example Structure of Local Government Accreditation System 84

Figure 9. Important Housing Sector Indicators 87

Figure 10. Proposed Slum Upgrading Implementation Framework 98

Figure 11. Government Budget Allocation to BSPS and FLPP Housing Programs 111

Figure 12. SDN yield curve November 12, 2014 131

List of Tables

Table 1. Percentage of Substandard Housing Units by Decile 8

Table 2. Various Housing Backlog Estimates for Indonesia 13

Table 3. Estimated Characteristics of Housing Need 14

4.5. Public Housing Policy 116

4.6. Mortgage Markets 129

5. Overview of Recommended Policy Actions 142

6. Relevant Case Studies 144

7. Selected Reference Documents 157

8. Glossary of Terms 159

Indonesia | Roadmap for Housing Policy Reformvi

List of Annexes Tables

Table 1. Percentage of Housing Units with Various Substandard Characteristics 64

Table 2. Various Estimates of Overall Housing Defi cit 65

Table 3. Characteristics of Indonesia’s Estimated Housing Need 66

Table 4. Imputed Housing and Housing Related Expenditures as a Percentage of Total

Household Expenditure 67

Table 5. Monthly Household Income, Expenditure and Funds Available for Housing 68

Table 6. Assumptions for Housing Finance Products Available 69

Table 7. Affordability Analysis by Decile with Assumed Housing Finance Products 69

Table 8. Median Home Price to Income Calculation, using National Averages 70

Table 9. Estimates of Home Affordability with Effective Public Policy 71

Table 10. Estimated Budget Required to Reach Policy Targets 73

Table 11. Priorities and Sequencing 90

Table 12. Slum Areas and Distribution by Province 92

Table 13. Rusunami Program Quick Facts 118

Table 14. Rusunawa Program Quick Facts 120

Table 15. Example of Delivery Targets for a Core Starter Home Program 123

Table 16. Summary of the Redesign of the Public Rental Housing Program 125

Table 17. Cost of Subsidy Type, as a % of Mortgage Loans 135

List of Box

Box 1. International Example of Housing Defi cit In Latin America 62

Box 2. FLPP Economic Cost and Comparison with the Down-Payment / Buy-Down

Subsidy Scheme (2005 – 2010). 137

vii vii

Indonesia | Roadmap for Housing Policy Reformviii

1 01 | Key Messages of the Roadmap

Key Messages of the Roadmap

01

Indonesia’s Roadmap for Housing Policy Reform aims to shape the government

action plans and investment in the housing sector, with a focus on forming an

immediate government response to urgent housing needs, while building the

foundation for rolling out more fundamental structural changes in the sector through

the next National Medium Term Plan (2015 – 2019).

The Roadmap recommends the following:

1Increase overall housing sector investment and reorient housing

policy to target the bottom 40% of the population through three

large national initiatives on: (i) comprehensive slum upgrading; (ii)

formal subsidized housing; (iii) incremental home improvement.

2 Implement a program to secure urban land for slum upgrading

and new affordable housing.

3Build delivery systems that strengthen and transfer responsibili-

ties from the central to local government and specialized actors

to share the responsibility and cost of implementing national

housing policy.

4Expand and enable the market for affordable housing for the

middle class, without exhausting public funds, by introducing

mortgage-linked down-payment assistance and supporting de-

velopment of the housing microfi nance and real estate sector.

Indonesia | Roadmap for Housing Policy Reform2

3 02 | Objectives of the Roadmap

Objectives of the Roadmap

02

proportion of total poverty. Building a strong

policy agenda and directing public resources

to housing and settlements in urban areas is

urgently needed to enable cities to improve

the living conditions of the lowest-income

Indonesians.

In recognition of this priority, this Roadmap

recommends that the Government of Indonesia

establish two core strategic objectives for the

housing sector to be achieved by 2019: (i)

ensure that no Indonesians live in slum areas

by comprehensively improving basic living

conditions for all slum residents; and (ii) ensure

access to affordable and safe housing solutions

for all Indonesians.

In order to meet these dual strategic objectives,

the government will need to achieve the

following targets:

Key Housing Sector Targets by 2019

Target 1 - Slum Alleviation: Comprehensively

improve the living conditions of 3.9 million

households estimated to be living in slums.

Target 2 – Meeting Affordable Housing Needs: Enable the delivery of around 14

million safe and affordable housing solutions to

overcome existing defi cits and meet demand

from new households.

2.1 Roadmap Background and Targets

The goals of Indonesia housing policy are

grounded in Law No 1/2011 on Housing and

Settlements that stipulates:

“Every Indonesian citizen should live in a decent and affordable settlement within a healthy, safe, harmonious, organized, integrated and sustainable environment.”

Poverty, population growth and rapid

urbanization over the past decade in Indonesia

have overwhelmed the government’s ability

to ensure citizens have access to safe and

affordable housing. Today, almost twenty

percent of all Indonesia’s 64.1 million

households live in poor housing conditions.

These settlement challenges will continue into the foreseeable future, with almost all of the new demand for housing concentrated in urban areas. It is expected that the

urban population will increase by 3.4 million

people each year between 2015 and 20191.

Furthermore, urban poverty is increasing as a

1 Natural population growth (35-40 percent of the urban population increase), rural to urban migration (25-30 percent of the urban population increase) and the reclassifi cation of rural areas into designated urban areas (30-40 percent of the urban population increase) each contribute to rapid urbanization.


To achieve these targets, over the next 5 years,

the government will need to build an action plan

to achieve the following specifi c annual targets

of housing production.

Estimated Annual Production Required to Reach 2019 Targets

780,000 slum households in improved

housing.

1.21 million units for the bottom 40% using

targeted public programs for core housing,

home improvement and public rental

solutions.

1.24 million affordable housing units for the

middle class (decile 5-8) enabled through the

market.

The primary purpose of the Housing Policy

Roadmap is to outline the strategy of the

Government of Indonesia a to operationalize

these objectives and work towards the

ambitious medium-term targets laid out in the

Medium Term Development Plan 2015-2019

(RPJMN).

The Roadmap outlines a mix of policies,

programs and initiatives that will enable the

government to signifi cantly improve living

standards in slum areas and increase the supply

of affordable housing solutions. The Roadmap

outlines specifi cally how the government can

allocate public resources to maximize the equity,

effi ciency and effectiveness of government

spending.

2.2 Roadmap Goals

The Roadmap has the following specifi c goals:

Inform the design of policy and programs

that will improve the conditions of existing

slums and squatter settlements, increase

the annual supply of formal low-cost housing

and enhance access to affordable housing

fi nance.

Build a strategy for the strengthening of institutions and systems for government to

be able to continue to effectively implement

housing policy.

Outline a framework for more effi cient and equitable use of public resources to

achieve housing and settlement targets.

Shape housing policy as a tool to support broader development objectives,

including inclusive and sustainable spatial

development of cities, job creation,

economic development and improved social

outcomes.

The Roadmap is organized around six priority

policy directions and an action plan of activities

to carry out in the immediate (0-12 months),

short-term (1-2yrs) and medium-term (3-

5yrs) to respond to immediate housing and

settlement needs of low-income Indonesians,

while setting the foundations for longer-term

structural reforms in the housing sector.

Target 1 - Slum Alleviation: Comprehensively improve the living conditions of 3.9 million

households estimated to be living in slums.

Target 2 – Meeting Affordable Housing Needs: Enable the delivery of around 14 million

safe and affordable housing solutions to overcome existing defi cits and meet demand from

new households.

5 02 | Objectives of the Roadmap

2.3 Roadmap Recommendations

The six priority recommendations of the

Roadmap are to focus investment and

resources toward:

Action 1: Developing and implementing a comprehensive slum upgrading program to improve the living conditions of residents in

existing slums and informal settlements.

Action 2: Redesigning public housing policy

to improve the effi ciency and effectiveness of

spending on public rental, vertical and core/row

housing solutions.

Action 3: Strengthen the design of the home improvement subsidies, to broaden the

number of benefi ciaries reached and enable the

crowding in of housing microfi nance.

Action 4: Enabling and expanding the market for the affordable housing and

increase private sector participation in the

low-cost formal housing market, by taking on

a down-payment assistance approach and

lowering costs of mortgage provision and

housing supply targeted at lower-middle class.

Action 5: Building robust delivery systems that enable central government to

transfer responsibilities and strengthen local

governments in execution of housing programs.

Action 6: Securing urban land for housing

through mobilization of under-utilized public

land assets and regularization of tenure of slum

and squatter settlements.


7 03 | Why Indonesia Needs Housing Policy Reform

Why Indonesia Needs Housing Policy Reform

3.1 The Benefi ts of Implementing Good Housing Policy

Housing can be understood as a critical part

of public infrastructure. Quality housing in well-

serviced neighborhoods generates signifi cant

benefi ts by building the capital asset base of a

household and contributing to stable economic

development and improved public welfare of a

community and country.

Affordable housing is in the public interest. By

investing in affordable housing government

creates positive externalities in the following

areas:

Health Outcomes. Safe and sanitary

living environments can have signifi cant

positive public health impacts by reducing

incidence of respiratory, cardiovascular and

communicable illnesses and diseases.

Educational Attainment. Decent and

affordable housing in safe neighborhoods has

been associated with improved educational

outcomes for children. A US study found

that the best education outcomes for

children occurred when households did not

spend too much or too little of their income

on housing.

Economic Development. Provision of

affordable housing at scale is an economic

development opportunity. Globally, the low-

cost housing market is estimated at a value

of more than US$424 billion.

Job Creation. Housing construction has

proven to be one of the strongest job creators

per unit of public expenditure. Studies have

resulted in estimates that range from 2 to 5

permanent and temporary jobs created for

every unit of housing produced.

• Sustainable Cities. Well-located housing

close to jobs and public transport can help

contain negative impacts of congestion on

individuals and the economy. For example,

housing close to jobs can reduce daily

travel distances for workers and reduce

congestion.

3.2 Overall Housing Context

Housing Demand

Indonesia currently has substantial unmet housing needs. There are approximately 64.1

million housing units in Indonesia, around 20%

of which are in poor condition. Estimates of the

backlog vary widely. In the census of 2010, BPS

calculated the backlog to be around 11.9 million

units, based on home ownership information,

which is estimated to have increased to 13.5

million by 2014. The number of substandard

units, using a measure for overcrowding

(<7.2m2 per capita) is 7.5 million. Meanwhile,

45% of households or 28,900,000 units are

considered substandard by some measure,

either because they are over-crowded, built

of at least one poor quality material, or do not

have access to basic services..

Annual demand for additional housing exceeds supply. An estimated 820,000 to

03


920,000 new units are needed in urban areas each

year to respond to annual demand from population

growth.2 However, currently, the formal sector

only produces around 400,000 units per year, of

which 50,000 to 100,000 units are products of

the subsidized mortgage program. An additional

150,000 to 200,000 units are enabled each year,

through government subsidy programs, including

those for incremental home improvement, rental

housing and social housing. This leaves over

200,000, or around 30% of new households,

that must resort to informal solutions or additional

over-crowding. Furthermore, demographics

show that new household demand tends to be

disproportionately low-income, due to higher

population growth among lower income deciles.

Affordability remains a key constraint to signifi cantly improving housing outcomes in Indonesia. Only the top 20% of households (deciles

9 and 10) in terms of income in Indonesia are

capable of acquiring housing in the formal market,

2 Using average household size as 4.1, BPS and UNPF Population Growth Data.

taking into account household income estimates,

existing market values for standard housing units,

and the availability and terms of existing fi nancial

products for home acquisition or improvement.

The ‘middle’ 40% (deciles 5 to 8) of households

cannot afford formal housing solutions without

subsidy enhancements. Whereas the bottom 40%

of Indonesians (deciles 1 to 4) live below or close to

the poverty line, leaving little room for savings and

housing, and cannot afford even a basic starter unit

valued at IDR 15-30m. A formal housing solution

is far beyond the reach of the poorest Indonesians

without deep and expensive subsidies.

The penetration of mortgage fi nance is limited in Indonesia, making affordable housing less accessible for lower income households. Mortgage lending accounted for only 2.44% of GDP

in 2012, compared to 5% in India, 10% in Thailand

and 31% in Malaysia. The extent of mortgage

lending is constrained by a complex range of

factors. First, most Indonesians simply cannot

afford a mortgage without subsidy enhancements.

Current and recent GoI mortgage-linked subsidy

programs have suffered from both inadequate

Table 1. Percentage of Substandard Housing Units by DecileNation-

wideOver-

crowdingLack of Basic Utilities Substandard Construction Materials Combination of

Substandard Characteristics

Decile <7.2m2 No Water No Sanitation

No Water &

Sanitation

Roof Wall Floor All Sub-stadard

Overcrowded or No Basic Utilities or

Substandard Material

Over-crowded and No Basic

Utilities and Sub-standard Material

1 27% 27% 61% 22% 12% 19% 22% 4% 69% 7%

2 19% 21% 51% 16% 9% 16% 16% 2% 60% 4%

3 15% 18% 46% 13% 9% 14% 13% 2% 55% 2%

4 13% 16% 43% 12% 8% 11% 10% 1% 51% 1%

5 12% 14% 38% 9% 9% 8% 9% 1% 48% 1%

6 8% 12% 32% 8% 9% 8% 7% 1% 42% 1%

7 8% 11% 29% 7% 10% 7% 6% 1% 40% 0%

8 7% 8% 22% 5% 10% 4% 4% 0% 35% 0%

9 5% 6% 16% 3% 10% 3% 2% 0% 29% 0%

10 3% 3% 9% 1% 10% 1% 1% 0% 21% 0%

Total 12% 14% 35% 10% 10% 9% 9% 1% 45% 2%

No. of Units

7,543,340 8,758,632 22,316,246 6,266,012 6,125,329 5,852,233 5,804,551 785,497 28,915,894 1,112,974

Source: BPS Susenas Survey, 2013


funding and poor

design. Second,

over 60 percent

of Indonesians do

not form part of

the formal work

force and hence

lack access to the

fi nancial system.

Many of these households may be able to

afford a mortgage but lack credit histories.

The fi nancial sector has not yet sought out

to develop innovative underwriting and credit

risk management procedures to reach lower

income and non-salaried earners – viewing

them as high credit risk. Third, the banking

sector lacks access to affordable, long-term

funding from the capital markets. Without the

evolution if this secondary market, Indonesian

banks will be limited in terms of their ability to

fi nance long-term mortgages from short-term

deposits.

Housing Supply

Supply constraints limit the private sector from participating in low-cost housing production. Bottlenecks in the availability

of land, including complex land acquisition,

permitting and servicing processes, constraints

on development fi nance and the rising cost

of construction have made formal housing

development an expensive and risky activity.

This has kept annual production numbers low

overall, particularly for low margin affordable

units. Developers have little incentive to build

for the low-cost market, preferring to maximize

profi ts where still strong demand from higher-

income families or investors exists.

New affordable housing supply is often poorly located, pushing the urban poor to city peripheries. Lack of fi nance and the high

cost of land in inner city areas mean that low-

income households often resort to purchasing

housing at the periphery of cities. As a result,

these households end up paying premiums for

transportation costs, which creates a broader

negative impact in terms of congestion and

spatial development patterns that are neither

economically effi cient nor sustainable. Taking

into account accessibility issues, and ensuring

there is space for the urban poor in cities, is an

important consideration for broader urban and

economic development objectives.

Government Measures

Indonesia has developed a broad set of policies and institutions to support housing provision, yet these have not been effective at improving housing outcomes

Only 20 percent of the highest income households in Indonesia, are capable of acquiring housing in the formal market

Figure 1. Estimated Housing Affordability in Indonesia in Market Conditions*Household

DecileMonthly HH

Income (m, IDR)

Monthly Payment Capacity^ (m, IDR)

Estimated Affordable Home Price w/ Loan

Alone (m, IDR)

Estimated Affordable Home Price w/ Down

Payment (m, IDR) Can Afford Commercial

Units10 13.9 5.6 463 million 661 million

9 7 2.6 216 million 309 million

8 5.2 1.8 99 million 110 million7 4.2 1.4 74 million 82 million6 3.6 1.1 44 million 49 million5 3.1 0.9 38 million 43 million4 2.6 0.7 18 million 19 million

Cannot afford even basic core unit

3 2.1 0.5 13 million 14 million2 1.8 0.4 6.7 million 6.7 million

1 1.2 0.1 2.3 million 2.3 million

Source: Author Calculations^ EMI - Equated Monthly Installments* This calculation uses rough assumptions with a gradated housing fi nance product mix, from commercial loans at 12%

p.a. and 15 year tenor available to the highest deciles to housing microfi nance products of 2 years duration and 25% p.a. interest for lowest decile. Savings capacity is also assumed to be gradated from 30% for D10 households to 0% for D1 households.


at the scale necessary. These include, but

are not limited to: (i) a series of neighborhood

community development programs; (ii) highly

to fully subsidized public rental programs;

(iii) up-front subsidy for incremental home

improvement (BSPS); and (iv) a subsidized

liquidity facility (FLPP) which aims to enhance

mortgage affordability for the middle-income

households by subsidizing interest rates for

fi xed rate mortgages. Furthermore, Indonesia

has established a series of state-owned

enterprises, including Perumnas, BTN, SMF,

Jamkrindo and Askrindo, that are entrusted to

play an active role in improving supply of and

access to affordable housing through direct

housing development and the extension of

mortgage insurance. Additionally, several local

governments have innovated with their own

programs that have achieved some localized

results, e.g. a housing microfi nance scheme

in Palembang and a rental housing program

administered by DKI Jakarta.

Nonetheless, government spending on housing in Indonesia remains far too small to make a signifi cant impact. In 2013, GoI

committed only 0.3% of the total central

government budget to the housing sector. This

accounted for only 0.05% of GDP, signifi cantly

less than housing budgets of international and

regional comparators, i.e. United Kingdom

(1.42% of GDP), Thailand (2.15% of GDP)

and the Philippines

(0.31% of GDP).

Going forward,

Indonesia should

consider signifi cantly

increasing spending

in the housing sector

– particularly targeted

towards the poorest

Indonesians – as a

means to improve

housing outcomes.

The quality of public spending in the housing sector has considerable room for improvement. The Ministry of Housing has

disbursed only 68.2% and 67.2% of allocated

budget in 2011 and 2012 respectively, improving

to 87.6% in 2013. Ministry of Housing programs

with the highest budget allocations struggle

to disburse. In 2012, the FLPP program only

reached 48.7% of the target number of units

and disbursed 54.9% of funds.

Government spending is not always equitable, nor does it reach the neediest. Current housing spending is regressive – it

disproportionately benefi ts higher income

groups – in three important ways. First, the

overall budget allocation in the housing sector

disproportionately favors programs targeted

to – or likely captured by – middle or upper-

middle class households. From 2011 until

2014, 43.3% of Ministry of Housing budget

was allocated to the FLPP program (which

caters for households with base salary of up to

IDR 4 million per month, and likely much higher

household income), while the rest of the budget

was divided among other programs, including

the BSPS incremental home improvement

subsidy program (IDR6.3 trillion, 19.3% of

budget), the Rusunawa rental housing program

(IDR4.9 trillion, 15.3% of annual budget), and

neighborhood upgrading and titling programs,

all of which target lower income households.

Second, the absolute value of subsidy to

households across programs is signifi cantly

higher for programs that target relatively higher

income households. Relatively higher income

households accessing the FLPP program can

benefi t from a subsidy of around 58% of the

Figure 2. Total Budget Allocation to Programs by Ministry of Housing, 2011-2014 (tr. IDR)

FLPP

RusunawaBSPS

Other Programs

2

6

10

14

18

Source: Ministry of Housing, Budget Division

In 2013, GOI spent 0.05% of

GDP on housing, signifi cantly

less than the housing budgets

of international and regional comparators


total mortgage value on a net present value

basis, which equates to around IDR 30 million

per unit, while in contrast, the BSPS incremental

housing improvement subsidy targeting lower

income benefi ciaries is only IDR 7.5m to IDR

15.0m. Lastly, within individual programs,

subsidies are not scaled progressively to

income, thus enabling households that qualify

for and can afford a higher value housing

solutions to capture a greater absolute value of

subsidy.

The design of specifi c programs often does not refl ect broader policy objectives. Many

regulations do not follow policy objectives

or vice versa. For example, the responsibility

and tasks related to the provision of adequate

housing were transferred to local governments

by Regulation No. 38, 2007. Nonetheless,

central ministries still tend to allocate budget

to directly execute programs with only a limited

role for local governments. Meanwhile, many

local governments lack technical capacity,

resources and, in some cases, political interest,

to prioritize local housing provision. This

limits the sustainable impact of government

spending, as programs are often stand-alone,

and do not address structural diffi culties in local

government systems.

There is a lack of feedback loops, accountability or reporting on program implementation. Good accounting and auditing

procedures as well as market monitoring

helps to inform budget allocation and decision

making. This relates to resource allocation,

spatial planning, land management and

permitting systems and primary infrastructure

planning to support more strategic investments

to respond to local population growth and

rural-to-urban migrants.

These failures in the low income housing markets and the limited effectiveness of policy interventions have contributed to the proliferation of slums. An estimated 12.2% of

urban residents currently live in slums, which

cover approximately 37,400 hectares. If no

action is taken, it is expected that the area

in cities attributable to slums will continue to

increase, along with the number of households.

Many of these slum and squatter areas are not

legally recognized and hence, not accounted

for in city planning for basic service provision

becoming zones of exclusion, poverty and

substandard living conditions.

Decisive action and a clear strategy are needed to address these housing and settlement challenges. A key orientation for

government policy going forward would be

to channel fi nancial support and empower

local governments to assume leadership and

responsibility for implementing local housing

programs that include mix of interventions

based on locally specifi c challenges and

priorities. .

3.3 Characterizing Indonesia’s Housing Need

Housing Defi cit: The housing defi cit is a

number that should refl ect both quantitative

defi cit and qualitative defi cit.

In Indonesia, the number of households is

estimated to exceed the number of housing

units by approximately 1.2 million, which

could be considered part of the quantitative

defi cit. In 2010, BPS calculated the qualitative

housing defi cit to be 11.9 million units based

on census information. It is estimated that this

defi cit has since increased to 13.5 million units

or approximately 20% of Indonesia’s estimated

64.1 million units. These fi gures are nonetheless

misleading as the measure of the quantitative

defi cit is defi ned as those households that do not

own a home. The decision of many Indonesian

families to rent a home may be a function not

of an underlying defi cit but rather a legitimate

preference. The choice of other households to

cohabitate in multi-family settings may again be

voluntary, refl ecting neither an underlying defi cit

nor overcrowding conditions.

Meanwhile, BPS Susenas information currently

indicates that that 45% of existing homes, or

28.9 million units, are substandard in one of

the following factors: have one inadequate

housing material, do not have access to water

and sanitation or are overcrowded. This ranges

from the 7.5 million units that are overcrowded,


22.3 million units without access to improved

sanitation, 8.8 million units without access

to safe water, or the approximate 6 million

units with an inadequate roof, wall or fl oor.

Table 1 shows the distribution of inadequate

housing across different characteristics and

by household consumption decile, which is

also refl ected in Figure 3. While the bottom

40% of Indonesians suffer most acutely, middle

income households also experience signifi cant

qualitative defi cit characteristics.

As these estimates vary widely, this Roadmap recommends concrete actions to improve the measurement of the housing defi cit as a fi rst order priority. Central

agencies, such as MPWH and BPS, are

recommended to work collaboratively together

to defi ne more precise defi cit numbers, both in

terms of certain qualitative factors, household

preferences, as well as geographically-specifi c

needs and regularly update these on an annual

basis to monitor changes and progress on

policy implementation. One starting point may

be to defi ne a criteria using existing census and

Susenas data, e.g. (a) overcrowding effect (i.e.

less than 7.2m2 of living space per occupant);

(b) lack of standard utilities – water, sanitation,

electricity; and (c) poor construction materials

for fl oors, walls and roofs. This will allow the

government to fi ne-tune and disaggregate

its understanding of the qualitative defi cit to

more accurately target and design public

interventions.

Targets for the Housing Policy Roadmap. Current production of formal units is estimated

to be in the order of 400,000 units per year.

However, to overcome the backlog by 2019,

total production of new units and home

improvements will need to increase to as high

as 3.6 million housing solutions per year. This is

made up of the following two components (see

Annex 2 for further detail):

1. Demographic growth projections forecast

the need for 820,000 to 920,000 new units

Figure 3. Number of Substandard Housing Units by Decile

12 34 56 78 91 0

Decile

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000 N

o. o

f Uni

tsOvercrowdedNo basic servicesAll poor quality materials

Overcrowded and no basicservices

Overcrowded and no basicservices and poor qualitymaterials

Overcrowded and no basicservices and no poor qualitymaterials

No basic services or poormaterials

Overcrowded or no basicservices or poor quality



every year in order to accommodate new

household formation; and

2. Removing the current housing backlog

by 2019 creates an additional need for up

to 2.7 million units per year, depending on

estimates of the defi cit (see Table 2).

Approximately 390,000 of the target of 3.6 million

units per year will be needed by the wealthiest

20 percent of Indonesian households that are

capable of purchasing in the private formal

market. The remaining 3.2 million households in

need of housing solutions each year will require

active and coordinated government support

through the mix policy reforms, subsidies and

public programs outlined in this Roadmap.

There is no single approach to enable the provision of affordable and adequate housing in Indonesia. Housing needs and demand

are diverse across the country. Households in

urban, peripheral and rural locations across

Indonesia’s island groups use different materials,

construction techniques, have different levels

of access to the fi nancial system and face

different affordability hurdles. A large number

of currently substandard housing units can be

enhanced through assisted incremental home

improvement or expansion. Other households,

an estimated 12.2% of urban residents or as

estimated 3.9 million households, live in slums

requiring upgrading, in-situ redevelopment

or relocation. Additionally, a large number of

poor households with extreme affordability

constraints will require highly subsidized new

housing solutions in the form of public rental

or core starter units. Indonesia’s large and

growing middle class will continue to require an

effi ciently and progressively designed subsidy

policy to complement savings and mortgages

to make formal home acquisition possible.

Table 3 illustrates the characteristics of

the housing need according to household

expenditures decile and estimates of annual

needs by major segment of demand based

on three scenarios – achieving full access to

affordable housing by 2019, 2024 and 2029,

respectively. This simulation demonstrates the

maximum housing needs, assuming the total

housing backlog is 13.5 million units and that

annual new demand through population growth

and internal migration is 920,000 units per year.

The Roadmap for Housing Policy Reform

recognizes the need for a diverse set of policy

and program responses to the heterogeneity

of housing needs in Indonesia. Section 4 below outlines four Budget and Target

Scenarios, based on the achievement of the

dual objectives of this Roadmap of ensuring

that no Indonesians live in slum areas and

securing access to affordable and safe housing

solutions for all Indonesians by 2019, 2024

and 2029, respectively. Section 5 outlines the

Strategic Framework for Indonesia’s Housing

Policy, presenting the six key policy actions

that will be critical to making a transformative

impact on housing outcomes for lower-income

Indonesians. Section 6, Policy Directions,

provides a detailed summary of the rationale

and content of each of the six proposed

policy directions. Lastly, Section 7 outlines

the approach to Roadmap Implementation by

organizing key actions for each policy direction

into an immediate, short-term and medium-

term action plan.

Table 2. Various Housing Backlog Estimates for Indonesia

Backlog Estimates Classifi cation Total Units Annual Need to Reduce Backlog by 2020

Low Estimate Only slum households 3.9 million 780,000

Middle Estimate Only overcrowded units 7.5 million 1,500,000

High Estimate Non-home ownership, reported by

BPS and MPWH

13.5 million 2,700,000

Source: BPS and MPWH, 2013


Table 3. Estimated Characteristics of Housing Need

Annual Need to Address

Housing Defi -cit by 2019


Housing Defi -cit by 2024


Housing Defi cit by

2029

Objectives Example ofPolicy Solution

Slum Units 780,000 units 390,000 units 260,000 units 0% Slums Slum upgrad-

ing and home

improvement

subsidies.

Decile 1-4

(Non-Slum

Households)

1.20 m units 780,000 units 650,000 units Prevent forma-

tion of new

slums, increase

supply of af-

fordable formal

housing solu-

tions.

New subsidized

public rental and

core starter units.

Decile 5-8 1.25 m units 810,000 units 660,000 units Increase supply

of low-cost

housing to

reduce backlog

and meet new

demand.

Introduce

more effective

mortgage-linked

subsidy scheme

to enhance af-

fordability.

Decile 9-10 390,000 units 290,000 units 250,000 units Enable formal

housing market

to work.

Support second-

ary mortgage

market develop-

ment.

Total 3.6 million/yr 2.3 million/yr 1.8 million/yr

Source: Author Calculations



17 04 | Strategic Framework for Housing Policy Reform

Strategic Framework for Housing Policy Reform

The Roadmap for Housing Policy Reform provides a framework for the design and

investment in national policy, programs and systems that aim to achieve housing and

settlements sector goals. The following diagram presents the strategic framework

for housing policy reform in Indonesia, which is organized in three sections: (i) what

should be done; (ii) how it should be done; and (iii) pre-requisites for success.

04

What programs are to be developed:

Action 1. Develop a Comprehensive Slum Upgrading Program to improve existing

slum and squatter settlements, through structuring a program for city-led slum mapping

and management strategies, with investment channeled to in-situ upgrading, redevel-

opment and resettlement, where necessary.

Action 2. Reformulate the Approach to Formal Subsidized Housing including dif-

ferent typologies (core starter units, row houses, vertical housing) and tenure options,

(rental, shared-equity, owner-occupied) to respond to different stages in the housing

career.

Action 3. Redesign Support to Home Improvement to expand focus to low-income

urban areas and incorporate construction assistance, titling and crowding-in of housing

microfi nance.

Action 4. Enable the Affordable Formal Housing Market and Increase Private Sec-tor Participation to make formal housing more readily available to a greater number

of lower-middle-class households, by stimulating low-cost housing supply and a mort-

gage-linked down payment assistance approach on the demand side, while supporting

and enabling non-subsidized and market sources of liquidity to banks and fi nancial

institutions providing mortgages for low-cost housing.


How can these programs be implemented:

Action 5. Build Robust Delivery Systems where capacity building, funding and re-

sponsibilities for implementing housing programs are transferred from central gov-

ernment to local governments with enhanced assignments for Perumnas, SMF and

mortgage insurance providers as specialized supporting actors in the implementation

of housing policy.

Pre-requisite for success:

Action 6. Secure Urban Land for Housing and Settlements by bringing under-

utilized public land assets to market for the implementation of housing programs and

creating a legal framework to be able to direct public investment to improve living

conditions in informal settlements in the short-term, while building local capacity into

the medium-term to use alternative tools and instruments for increasing the availability

of affordable land for low income housing. .

Implementing this ambitious set of six integrated policy actions will enable the Government of

Indonesia to make a transformative impact on reducing the number of Indonesians living in slum

areas and increasing the availability of affordable housing solutions for all Indonesians.

19

Figure 4. Goals, Policy Solutions and Scenarios

Home improvementand core housing

Support marketfor formal housing

FormalSubsidized Housing

Slum alleviationand upgrading

Goals

Policy Solutions

0% slums by 2019

Increasehousing stock and

reduce the 14 million unit defi cit

Scenarios

= Slum Households = Deciles 1-4 (non slum)

= Deciles 5-8 = Deciles 9-10

= 100,000 Houses

to address defi cit by 2019

3.6 MM units per year







21 05 | Targets and Budgets

Targets and Budgets

The following scenarios provides some rough estimates of the total annual central

budget allocation and balance between programs, based on three scenarios –

achieving full access to affordable housing by 2019, 2024 and 2029, respectively.

Additional housing defi cit in D1-D4 is

reached by home improvement subsidies,

and new demand is addressed 80% by core

or row house units, and 20% by public rental

units.

All housing backlog and defi cit in D5-D8

is addressed by mortgage assistance and

market-making measures.

The costs of these policy solutions are also

roughly estimated to simplify calculations, with

an estimated 25% of overall budget being

used for management and administration of

programs.

05

The simulation has focused on the maximum

housing needs, using an estimated backlog of

13.5 million units and annual new demand of

920,000 units. New housing demand is spread

evenly across deciles, whereas the housing

defi cit is concentrated in lower-income deciles

(60% of backlog in D1-D4, 33% of backlog in

D5-D8, and 7% in D9-D10). Policy solutions

have been approximated as follows:

Slum households are addressed 80% by

slum upgrading, while 20% may need to be

resettled into public rental units.


SCENARIO 1: Reduce defi cits and meet new housing demand by 2019

SlumUpgrading

HomeImprovement

CoreUnits

Public RentalHousing

Down-PaymentAssistance

Management andAdministration

Totals

Number of Units(thousands)

620 830 290 230 1,300 25% of costs 3,200,000

Budget Required(IDR tr)

9.4 12.5 4.4 3.4 18.8 16.2 65 IDR tr

Requires 6.5x current housing-related budget or approximately 3.5% of total GoI annual budget


SlumUpgrading

HomeImprovement

CoreUnits




Totals


312 416 294 152 811 25% of costs1,985,000

units


4.7 6.2 4.4 2.3 12.2 9.9 40 IDR tr


23


SlumUpgrading

HomeImprovement

CoreUnits




Totals


208 277 294 126 663 25% of costs1,570,000

units


3.1 4.2 4.4 1.9 9.9 7.8 31 IDR tr


SCENARIO 4: Maintaining Current Budget Allocation

SlumUpgrading

HomeImprovement

CoreUnits




Totals


96 129 27 11 145 25% of costs408,000

units


1.4 1.9 0.7 0.5 2.9 2.5 10 IDR tr

Maintaining estimated current housing-related budget or approximately 0.5% total GoI annual budget

25 06 | Description of Policy Actions

Description of Policy Actions

Decile1-4

SlumUpgrading

NewSubsidized Housing

HomeImprovement

Decile9-10

Decile5-8

Enabling the Market

The six priority actions described in Section 4 will enable government to structure

a fl exible housing policy that responds to the needs and preferences of households

from different income levels in diverse urban settlements throughout Indonesia.

The fi rst three policy actions are focused on

the lowest 40% of households, or Decile 1-4.

These include Action 1 for comprehensive

slum-upgrading, Action 2 for supply of publicly-

subsidized, multi family, owner-occupied, rental

and incrementally-expandable core and/or row

housing, and Action 3 for home expansion or

improvement of substandard units.

Action 4 concentrates on enabling and

expanding the affordable housing market for

lower-middle class households - the so-called

“missing middle” - in Deciles 5-8 that struggle

to access long-term housing fi nance and lack

low-cost affordable units that meet their needs.

Finally, Action 5 to build robust delivery

systems, and Action 6 to mobilize urban land for

housing, are the basic pre-requisites to enable

government to deliver these programs and to

respond to needs across all target groups.


Recommendation

1. Develop a Comprehensive Slum Upgrading Program

Rationale

Public investment in slum upgrading is a

strategic and effi cient approach to target

poverty as it allows the government to exploit

the positive characteristics of slum settlements

and to mitigate the negative externalities of

urban slums. Slums are spatially contiguous

and concentrated clusters of shelter

defi ciencies and of mainly poor and very poor

households, which allows the government

to target and reach a population that may be

diffi cult to identify otherwise. In-situ upgrading

allows slum dwellers to strengthen their existing

social networks, and to continue to pursue

their economic activities (the two main reasons

they choose to live where they live), without

increasing their transport time and costs, while

improving their

living conditions

and giving greater

o p p o r t u n i t i e s

for schooling

and health.

F u r t h e r m o r e ,

slum upgrading

p r o g r a m s

p r o d u c e

A national slumupgrading programcould improve the living conditions of 3.9 million households living in37,400 ha of slums.

Make a high-level government commitment to build and implement a comprehensive

national program on slum upgrading to ensure that no Indonesians live in slum areas

by 2019. This policy will include: (i) the design of a national program, which builds

the technical, institutional and fi nancing framework for city-led slum mapping and

action plans for slum upgrading, redevelopment and resettlement; (ii) kick-starting

of the program with a select set of interested and committed large cities; and (iii)

scaling of the program to a broader set of cities and areas.

economies of scale to improve effi ciency of

public spending and create positive spill-overs

toward broader urban development objectives3.

Current government policy is to upgrade slums

that are legal settlements, while largely ignoring

illegal and/or informal squatters. This is not a

long-term solution, given the extent of squatter

settlements particularly in the larger cities. A

revamped slum upgrading policy will need to

address housing and settlement deprivations

in all areas regardless of tenure status.4 The

alternative, of moving squatters out to low-cost

housing in peripheral areas of cities, is usually

not sustainable as the economic and social

costs for slum dwellers are high and in many

3 For example, a high prevalence of water and mosquito-borne diseases in squatter settlements may inadvertently affect adjacent neighborhoods, even though the latter are services with proper infrastructure, utilities and services. Focusing on slums can have improved outcomes for broader objectives, such as public health, productivity and availability of a low-cost workforce.

4 One important rationale for action are larger public health concerns that legitimate at least the public provision of basic infrastructure and services even on disputed land, if not interventions in the individual housing units.


cases, they end up returning to the city center

to form new squatter settlements. Experiences

across Indonesia (and worldwide) show that

government needs to work towards a more

comprehensive approach, covering all manner

of slum and squatter settlements, that takes

into account livelihoods and social services,

and considers slums in the context of city-

wide development with the necessary primary

and secondary infrastructure investments to

support tertiary-level improvements.

Approach

1.1 Design the Framework for a National Slum Upgrading Program

In preparing the national slum upgrading

program, central government will need to

develop a set of tools and frameworks to

support local governments in the design

and implementation of city-specifi c slum

management strategies.

Design will include, an eligibility framework for

participating cities, resource kits for cities with

methods to map and assess slum and squatter

settlements, Standard Operating Procedures for

planning and preparation of in-situ upgrading,

slum redevelopment, and resettlement, steps

to develop city slum management action

plans and investment strategies, institutional

development, legal channels to recognize or

regularize squatter settlements, as well as

structuring of nationally-administered capital

grants, a technical appraisal framework for

eligible investments under the program, and

systems for monitoring and maintaining a

settlements information database.

1.2 Launch Phase 1 of the City-Led Slum Upgrading Program

The national slum upgrading program will be

kicked off with a fi rst phase that would cover

10 to 15 large cities over the next 2-3 years.

The main components of the national slum

upgrading framework may include: (i) identifying

and profi ling of slums; (ii) participatory action

planning and program formulation; and (iii)

program implementation and reporting.

(i) Identifying and profi ling slums. City

governments will establish a local unit that

will have the mandate and resources for

implementing the city-wide slum upgrading

program. This unit, supported by MPWH

training, toolkits and on-call technical

support, will then systematically identify

slum areas through city-wide enumeration

(with the participation of local communities)

and GIS-based mapping. Slums will be

profi led and categorized based on status

of tenure and pro-poor indicators that are

easily collected at the cluster level and

are part of monitoring local government

performance – such as access to basic

infrastructure, utilities and services such as

health and education.

(ii) Participatory action planning and program formulation. Local governments

formulate and adopt a city-wide action plan

and medium-term investment program on

slum and squatter upgrading. To formulate

this strategy, city governments will apply

the national framework that may cover the

following steps: a) engage and establish

community representation at settlement-

level; b) appraise the profi led slums to

identify needs, using a community planning

approach, for in-situ upgrading, slum

redevelopment5 and/or resettlement (for

squatter settlements on hazardous areas

or slums on land that cannot be released

due to extenuating circumstances6); c)

compile community action plans and

identify complementary primary/secondary

infrastructure needs; d) estimate costs,

prioritize activities and sequencing for the

city-specifi c slum management action

5 In-situ upgrading or redevelopment may require service delivery, tenure regularization, home improvement, additional community facilities – in addition to community institution-building and management.

6 For example, government land required in the short term for strategic purposes.


plan; e) prepare a medium-term investment

plan7 and fi nancing strategy that mixes

local government budget allocation and

central government subsidies, using

the established guidelines; f) identify

opportunities for crowding-in of private

sector, including contractors, housing

microfi nance and links with complementary

programs for home improvement, new

public housing development, or social

assistance.

(iii) Program implementation. Local

government will prepare legislation, where

necessary, to regularize tenure of slum

and squatter settlements8, and assemble

fi nancing through the submission of funding

7 Including local budget allocation, private sector investment and funding gap for consideration of central government subsidies.

8 <elaborate in land policy> Slum settlements on state land can be regularized through long-term lease contracts or user-rights either to individual households or to community cooperatives. This can be done for free, for a nominal fee or on a full cost-recovery basis.

proposals to central government as well as

from the local budget, to implement the

program. Specifi c projects will be selected

based on nationally-set criteria and

priorities, and based on reporting of the

results and the performance of participating

local governments.

1.3 Scale National Slum Upgrading Programs to all Cities and Slum Areas

The national program will be initially focused

on improving and regularizing tenure of slums

on state-owned land, where current data

indicates most slums are located, and a more

uniform approach to tenure regularization can

be applied. Upon successful completion of

Phase 1 of the program, the national program

would expand to include other interested

local governments and improvement of slums

located on other land types that require

more sophisticated instruments for tenure

regularization (e.g. based on land sharing,

readjustment/consolidation arrangements etc.).


2. Reformulate the Approach to Formal Subsidized Housing

of target populations. Public rental can be a

critical tool to support newly formed lower-

income households and industrial workers that

value fl exibility and mobility. Other households

that lack access to fi nancial markets may

value lease-to-own alternatives where lease

payments build equity in a housing solution.

Lastly, the government may also consider

targeting the provision of leasehold or freehold

basic public housing units to the extreme poor

and households that require relocation or

resettlement.

A government public housing strategy would

also consider enabling a wide typology of

public housing solutions to meet the diversity

of household demand and varying regional

characteristics. High and mid-rise public

housing units might be most appropriate for

consolidated larger urban areas where land

supply is constrained and higher-density

development should be encouraged, whereas

row houses or core starter units might be more

appropriate in cases of resettlement, relocation

or in smaller cities where land supply is less of

a constraint.

Recommendation

Reformulate the approach to formal subsidized housing by expanding the series of

publicly subsidized formal housing products to refl ect different housing career paths.

Diversify, reform and expand the physical typologies of publicly subsidized formal

housing to include programs for core starter units, row houses and vertical housing

developed to respond to a diversity of needs and regional markets. Similarly, enable

a diversity of tenure options including public rental, leasehold, owner-occupied, and

shared tenure.

Rationale

The bottom 40 percent of Indonesian

households cannot afford formal market-rate

housing solutions. The only housing alternatives

available to these households are to either

produce incrementally on a self-help basis or rely

on highly subsidized public housing provision.

Self-built housing constitutes the majority of

new housing construction in Indonesia. While

support for low-income households to build

incrementally is a critical part of the proposed

policy mix in this Roadmap, the government will

also need to reformulate public housing policy

and expand public housing production in order

to effectively address the housing defi cit. A

robust and diversifi ed system of public housing

production will be necessary to respond to

different characteristics of household and

regional demand.

An enhanced program of public housing

production would need to carefully consider

accommodating a range of tenure options,

including rental, lease-to-own, leasehold and

full ownership, based on the underlying needs


E f f e c t i v e l y

i m p l e m e n t i n g

and managing

public housing

p r o g r a m s

is inherently

challenging. The

g o v e r n m e n t

approach to

public housing

would consider

c o n c e n t r a t i n g

land and public

housing development with specialized public

actors. Enabling both Perumnas and the private

sector to assume more proactive roles will be

critical to jump-start large scale public housing

production. Lastly, public housing programs

must be closely matched to local demand and

public housing assets maintained at the local

level. A key component of the government

public housing strategy would be to facilitate

the transfer of knowledge and responsibilities

for designing and implementing public housing

program to local governments.

Approach

2.1 Revitalize Perumnas’ Role as Master Developer in Public Housing Production

A core recommendation of the Roadmap is to

revitalize and renew the mandate of Perumnas

to act as the Government of Indonesia’s master

developer for public housing production. GoI

would provide Perumnas with the mandate

to lead bulk housing development on newly

released land. As outlined in Policy Action 6,

GoI will develop a land inventory and utilization

program to identify and mobilize under-utilized

or vacant public land assets. Land to be

released or assembled under this program is

currently under the oversight of SOEs, LGs,

BPN (abandoned land), waqaf, and various

line ministries. At a strategic level, Perumnas’

experience in land acquisition, aggregation,

development and management should

be leveraged by the land assembly entity

responsible for executing the program.

In conjunction, Perumnas would be revitalized

to act as a publicly-owned private institution

that serves as the lead developer, developer

joint-venture partner, or lessee of land under

the strategically released land portfolio, to

facilitate new production or redevelopment and

the implementation of housing policy.

In this role, Perumnas will be able to support

local governments with the delivery of housing

for sale, long-term leasehold options, as well

as for rental (whereby local governments act

as landlord), with features similar to Turkey’s

TOKI or Morocco’s Al Omrane initiatives (see

Annex on case studies). High performing local

governments could utilize Perumnas as co-

developers, whereas, Perumnas can take a

lead on development partnerships with lower

capacity local governments, which in turn, gain

knowledge through project experience.

Perumnas hasreduced its production capacity to only around 4% or 16,000 units in 2013, yet expects it could scale up to 50,000 units per year given the right support.

International Benchmark: TOKI

Turkey Public Housing Developer

TOKI was established in 1984 to deliver well-planned affordable housing at scale. Regulatory

amendments in 2003 and 2004 has allowed TOKI to become directly active in developing mass

affordable housing for sale or rent to low and medium income households, reporting directly to the

Prime Minister. TOKI identifi es land areas for priority housing projects, prepares site master-plans,

assembles fi nancing for development, partners with municipal housing companies and private real

estate developers and sells units to end users. TOKI engages private sector developers through a

public tender process and revenue-sharing model and also has the power to expropriate and rezone

land.


Specifi c activities of Perumnas may include

taking a lead on site master-plans for projects,

incorporating principles of mixed-use and

mixed-income zoning for sustainable settlement

planning, structuring development plans and

fi nancing strategies, facilitating release of

land to private sector developers (structuring

the RFQ and RFP processes and taking on

non-commercial risk), as well as low-income

households or communities for affordable

housing development, coordinating potential

development guarantees, trunk infrastructure

delivery, arranging sales agreements or off-plan

escrows and acting as landlords for lease-to-

own housing.

For this strategy to be successful, a business

plan will need to be developed for revitalizing

the role of Perumnas, clearly defi ning the needs

for institutional strengthening, structuring of the

legal and fi nancial relationships with central and

local government entities, and the framework

for engagement of private sector.

2.2 Introduce Starter Core Units as a Housing Solution

Develop and introduce a program for subsidized

basic core starter units or row houses that are

incrementally expandable, targeting lower-

income and vulnerable households. These

programs could be implemented in the context

of both the relocation of households in slum

upgrading and redevelopment programs as

well as for greenfi eld developments to prevent

new slum formation.

Incrementally expandable starter cores are

considered a strategic housing solution for

Indonesia for several reasons:

(i) Affordability. Poor, vulnerable and low-

income households cannot afford to

purchase completed units. Public provision

is essential if these households are to

obtain safe housing solutions.

(ii) Cost Effectiveness. Housing is a capital-

intensive good and public funding is fi nite.

Expandable core starter units and row

houses are far more affordable than formal

housing units and can serve as a strategic

tool for producing large numbers of housing

solutions at a moderate cost.

(iii) Adjusting to the Housing Career. An

incrementally expandable starter core

allows expansion and improvement of the

initial unit according to changing household

needs and preferences over time.

(iv) Leveraging Swadaya - Community-Driven Approaches. A structured program

around incrementally expandable starter

cores can leverage citizen participation and

community driven development through

in-kind as well as in-cash resources

contributed by community members or

social organizations.

In the immediate-term, the new program for

subsidized basic core starter units and row

houses will need to be designed. Aspects

of this program will include the types of

eligible projects and housing products,

delivery systems that support and enable

local government-led initiative and integrate

community-based models for implementation

(e.g. kampung deret), as well as guidelines for

project planning, fi nancing and implementation,

subsidy allocation, eligibility and targeting

of benefi ciaries, post-construction asset

management practices, as well as the plan

for broader program roll-out over the medium

term.

In the short-term, the

program would

be launched

with the delivery

of basic core

starter and row

house units

in multiple high priority projects across 10-15

medium-sized or secondary cities, both linked

to slum upgrading and in greenfi eld initiatives.

This phase would include careful supervision,

monitoring and evaluation of program results.

Capable local governments can

take a lead role as codeveloper or JV

partner in affordable housing developments.


(i) Rusunawa 2.0 benefi ciaries and affordability. Rusunawa 2.0 projects should

give fi rst priority to households displaced by

redevelopment activity or necessary slum

relocation. Maximum allowable benefi ciary

income should be set annually. The

program could use local minimum wages to

correspond to the lesser of local minimum

wage or to households that rank in the

lower 4 deciles nationally and adjust rent

levels based on income.

(ii) Roles and capacity building under Rusunawa 2.0. Authorities, responsibilities

and resources will be pushed to the local

level of government where there is existing

capacity, allowing the central government

to focus on policy and strategy. Where

local capacity is limited, fi nancial and

training resources will be made available to

increase the ability of local governments to

participate in the provision of rental housing.

Interim delivery methods will be established

in the short and mid-term, calling upon the

capacity of Perumnas to fi ll in the gaps.

Roles under Rusunawa 2.0 include:

1. Central Government, can be charged

with sizing production goals and

budget, allocation planning, monitoring

and evaluation.

2. Provincial Government takes on the

role of advisory and consultation on

policy and program development and

evaluation.

3. Local Government, depending

on capacity, will propose projects,

accept funding from MPWH and act

as developer and owner or may joint

venture with Perumnas or a private

developer. Local governments who are

deemed to have insuffi cient capacity

can also nominate projects for funding

by MPWH for development and

ownership in joint venture by Perumnas.

They will also be the recipients of

capacity-building funds from MPWH.

In this period, a larger variety of starter and row

house options can be considered, differentiated

by size and quality of fi nishings, the level of

infrastructure provided and type of land tenure.

These options could be analyzed and piloted

in the short-term and successful approaches

would be mainstreamed in the medium-term.

In the medium-term, the program would

expand nationally, while diversifying starter and

row house options, based on the demand of

local governments. Local governments will take

a lead in identifying local needs for core or row

housing in their jurisdictions and be supported

and transferred increasing responsibilities

in project preparation and implementation,

including identifi cation of benefi ciaries, sites,

subsidy allocation and procurement and

oversight of contractors.

A key challenge of the program will be to

improve the delivery system of core starter

units to better coordinate over time with

broader urban development plans. This may

include consideration of investment in public

transport and other infrastructure, proximity

to employment opportunities, as well as

key socio-economic factors of benefi ciaries

(e.g. maximizing ground fl oor access where

benefi ciaries have street-based businesses).

Such coordination will enable local governments

to promote shorter commuter times, local

economic development and sustainable urban

growth. Over time, the program could also

explore settlement projects that mix uses and

households of different incomes.

2.3 Reformulate Public Sector Support to Rental Housing

The Rusunawa program for public rental

housing can be reengineered to increase

production levels and to improve the quality

and sustainability of the real estate while serving

low-income populations. The new Rusunawa

program (Rusunawa 2.0) should be developed

to increase the level of local government control

to align with decentralization goals. Some key

attributes of Rusunawa 2.0 would include:


4. Perumnas. The State Owned Enterprise

(SOE) Perumnas will act as designated

lead developer for Rusunawa projects

which are located in low capacity local

government jurisdictions.

(iii) Allocation and types of funding under Rusunawa 2.0. Allocation of funds should

initially occur on a fi rst-come, fi rst-served,

basis to spur the highest levels of initial

production at program launch and will later

be replaced by a competitive allocation

system. The types of funding available will

be more comprehensive than the current

program and will include:

1. Administration. Funds to support

central and local government

administration of the program.

2. Capacity Building. Funds to

build competencies of central and

local government where they are

lacking, particularly in support of

decentralization goals.

3. Capital. Funds for the construction

of the housing units and necessary

infrastructure.

4. Operating. Funds to off-set the

difference between tenant rent payment

capacity and the costs of operating

maintenance and replacement.

2.4 Require and Support Good Asset and Property Management Practices

Policy measures can be taken to ensure that

all properties that are developed with public

support and resources are well managed so

that the physical structures are maintained

and serve the longest possible useful life.

This is in the interest of protecting the public

investment and also to ensure that the rental

housing provided is of a decent quality for the

benefi ciaries.

Government should develop requirements and

SOPs that relate to construction standards

(materials, design and spatial planning), as

well as operating standards (management

protocols, tenant selection, annual budgeting

and multi-year projections, etc.) and capital

needs standards (multi-year projections and

reserve sizing).

The property management standards and

procedures that are developed will need to

be socialized with local governments during

project initiation and then monitored and

reported systematically in order to allow local

governments to qualify for additional project

funding where performance is high, or additional

support, where the performance is lagging.

Indonesia’s Unifi ed Database for Targeting: TNP2K

Established by Presidential Decree No. 15/2010 on the Acceleration of Poverty Reduction.

The Unifi ed Database (BDT) for social protection programmes is an electronic data system that contains

social, economic and demographic information on 40 percent of people in the lowest welfare bracket in

Indonesia, around 24.5 million households or 96 million individuals. Operated by the National Team for

Poverty Alleviation Acceleration (TNP2K), the Unifi ed Database can be used for programme planning,

targeting, and identifying the names and addresses of prospective social assistance recipients, whether

they target households, families or individuals.


3. Redesign Support to Home Improvement

Recommendation

Rationale

The current government subsidy program

to support home improvement (BSPS) is

successfully being implemented and is fulfi lling

its goal of helping lower income households to

effectively improve and expand their homes.

However, the program is limited in terms of

reach and effectiveness. Key constraining

characteristics of the program include: (i)

the BSPS program primarily reaches rural

households, and may have more impact if

coupled with an explicit focus on growing

demand for home improvement support in

urban areas; (i) central government plans and

manages all the functions to support benefi ciary

households, which makes implementation of

the program costly and diffi cult to scale for

the public sector; (iii) grant funding delivered

to benefi ciaries could be better leveraged

by private sector participation to improve its

effectiveness.

The BSPS program has substantial potential

to broaden its reach by improving program

effi ciency and leveraging housing microfi nance.

Most importantly, increasing overall funding

and infl ecting the program towards urban areas

could improve housing conditions in urban

Redesign the government support to home improvement and incremental housing,

by: (i) strengthening the design and delivery systems of the existing BSPS subsidy

program; (ii) link home improvement subsidy with other public housing programs,

including slum upgrading and expandable core houses; (iii) promote incremental

middle-class home expansions; (iv) support development of local and regional

building industries; (v) support the development of and crowding in of housing

microfi nance.

slums, help mitigate

new slum formation

and alleviate

o v e r - c r o w d i n g

pressures for urban

low-income and

lower-middle class

households.

A series of measures can be introduced to

enhance the effi ciency and leveraging of the

home improvement subsidy. This Roadmap

outlines measures to: (i) shift the role of central

government from directly implementing the

home improvement subsidy to an enabler and

facilitator; (ii) reduce costs associated with

materials, engineering support and labor linked

to the program; and into the medium-term, (iii)

support the growth of the housing microfi nance

as a complement to the program.

Approach

3.1 Strengthen the Design and Delivery of the Existing Home Improvement Subsidy

The current subsidy program could be

strengthened in the following ways:

An estimated threequarters

of all unitsin Indonesia are

built by householdsincrementally.


(i) Identifi cation and Eligibility. Complement

the existing benefi ciary identifi cation system

with the utilization of the Unifi ed Database

(BDT) for social protection programs

operated by the National Team for Poverty

Alleviation Acceleration (TNP2K), which

can act as an effective tool for controlling

selection of fi nal benefi ciaries.

(ii) Budget Allocation and Subsidy. The

Roadmap recommends to signifi cantly

increase budget allocated to the program

and expand access to the lowest income

households, adjusted by geography (i.e.

by province and by rural/peri-urban/urban/

metro) and consider moving to a less

regressive, possibly fl at or even progressive

subsidy system across income segments

and housing options9.

(iii) Delivery System. Improve the design of the

subsidy and signifi cantly reduce overhead

expenses through: (a) shifting toward a local

government-led implementation model; (b)

standardize the system for the provision of

engineering advice so that it is scalable;

(c) facilitate the crowding-in of housing

microfi nance; (d) address bottlenecks,

where possible, to ensure that there is title

regularization of all homes participating in

the program.

(iv) Improved Targeting. Complement the

refi ned rural program with new programs

with strategic targeting characteristics,

such as (a) densely populated urban

clusters of slum/squatter/starter core

households in order to enjoy economies of

agglomeration and scale; (b) lower-middle-

income households willing to expand their

9 i.e. the poorest of the poor should get the relatively and/or absolutely largest subsidy; the same applies to smaller units that should receive a relatively and/or absolutely larger subsidy. Under such a fl at or progressive subsidy system it is important to ensure that, at any income level, household s with slightly higher income get access to a slightly better unit (e.g. larger size, better fi nishgins, better infrastructure) while paying more for it. Otherwise, high co-payments for lower housing standards is expected to create disputes, so a small gap should still remain.

homes in order to create additional units at

a low cost.

3.2 Link Home Improvement Subsidy to Other Public Housing Programs

For urban areas, it is strategic to focus on

spatial clusters of highly concentrated sub-

standard housing. Slum and squatter areas

that have recently been upgraded and new

housing projects with starter-core units are

ideal targeting scenarios, not only because

of the high concentration of low-income

households, but also because the provision

of basic infrastructure and tenure security can

help to create a stimulating environment for

additional investment in home expansions and

the home improvement subsidy can help to

maximize economic spillover effects.

Therefore, the cluster approach in upgraded

areas and starter core developments combines

improved targeting characteristics with high

expected willingness to invest in housing.

This combination is expected to be the ideal

ground for identifying and innovating effi cient

delivery systems for the crowding-in of

housing microfi nance, support of local building

industries and provision of technical assistance

to support sound home expansion.

3.3 Enable Home Expansion for the Urban Middle Class

Design a home expansion program to support

improvements and expansion of lower-middle-

income homes to (i) tackle overcrowding and

(ii) create additional (e.g. rental) units, reducing

overall urbanization pressure and alleviating the

burden on government.

Program parameters that could be considered

include: (i) linkages to the housing mortgage or

microfi nance program, depending on borrower

and collateral characteristics; (ii) a subsidy, if

any, that should not exceed the amount of the

low-income incremental home improvement

subsidy and the mortgage assistance,

depending on the credit source; (iii) technical

construction support, similar to the assistance


which is used in other home improvement

programs. This construction support could be

provided via professional networks with trainings

and practitioner guidelines for home expansion

and then linking middle-class households with

those architectural and engineering consultants

that are deemed qualifi ed.

3.4 Support Development of Local Building Industries

Explore measures to support development

of local building industries, with the following

objectives: (i) to increase production of and

availability to more affordable good-quality

construction materials; (ii) to stimulate local

business development and job creation for

artisans and builders in the construction

sector; (iii) improve environmental sustainability

and maintain cultural preferences through use

of local building materials and construction

techniques.

Strategies to be explored include: (i) labor-

intensive construction technologies for core

houses; (ii) training of microenterprises and

artisans in construction techniques for quality

home improvements and expansions; (iii)

industrialization10 and standardization of local/

regional building material manufacturing; (iv)

reduction of trade barrier and costs to improve

availability of affordable and quality construction

materials; (v) technical assistance to home-

owners to reduce cost and ensure compliance

with construction standards for adequacy and

safety; (vi) adaptation of regulations and policy

to concentrate on realistic and fl exible minimum

standards.

3.5 Support Development of and Crowding-in of Housing Microfi nance Sector

The Roadmap recommends support in the

medium-term toward the development of

the housing microfi nance sector to provide

10 Industrialization is not to be confused with large-scale prefabrication, as the approach should be labor-intensive.

improved options for households who want

to make higher-cost expansions or improve

units in future. These housing microfi nance

(HMF) loans could be used by households in

combination with a subsidy or independently.

Currently HMF lending is not very developed in

Indonesia, though there is anecdotal evidence

that a substantial portion of microloans are used

for home improvement purposes. Development

of the HMF industry may require fi nance and

technical assistance to be channeled to

fi nancial institutions to support them to develop

HMF products. HMF are unique as they require

a combination of fi nancial lending services

and non-fi nancial services, in order to address

the specifi c risks of home construction. This

requires training of loan offi cers or partnerships

with building materials providers to assess

home improvement projects, prepare cost

estimates for materials, as well as to monitor

quality of construction.

This Roadmap recommends the government

consider supporting incubation of HMF

product development with several pilot fi nancial

institutions in different regions of the country.

This support could be provided via an NGO

contracted by government, regional banks,

or via a state-owned enterprise, like SMF.

Technical support should include systems for

consumer education and eligibility, training of

loan offi cers, HMF product design, IT systems

etc. Based on the results, the capacity building

program can be fi ne-tuned and scaled all over

the country, provided for a fee, as demanded

by fi nancial institutions.

In the medium term, the government might

consider initiating a special state-enabled

revolving fund that would provide liquidity to FIs

for HMF at rates equal to the costs of funds

to the government. This revolving fund may

be linked to the long-term liquidity provided

through the reformed FLPP program, enabling

a certain level of integration across housing

fi nance and housing microfi nance and better

level of fi nancial integration for low-income

households.


4. Enable the Affordable Formal Housing Market

The Indonesian government has developed a series of measures to promote mortgage lending in the affordable market segment, including the state-owned entity, SMF, whose

mandate is to raise funds on the bond market

and provide medium and long term liquidity to

support housing loans up to the middle market;

a subsidy scheme, FLPP, that refi nances

housing loans at below market conditions;

and the provision of credit default guarantees

through state-owned insurance companies,

ASKRINDO and JAMKRINDO.

Recommendation

The Roadmap makes a broad series of recommendations to reformulate the

GoI approach to enabling the market for formal housing for lower-middle income

Indonesians. First, Indonesia should transition to a demand-side down payment

subsidy mechanism to broaden the access to and the affordability of housing fi nance

for low and middle income groups. Second, replace the existing highly subsidized

and expensive liquidity support under FLPP with market rate liquidity to ensure

access to long-term funding for banks and fi xed rate mortgages for consumers.

Third, explore potential measures to extend the mortgage market for affordable

formal housing to self-employed, informal and non-salaried workers that have the

ability to pay but lack access to mortgage fi nance. Fourth, strengthen the GoI

system of mortgage guarantees. Fifth, strengthen the role of SMF to operate more

actively as a secondary mortgage market actor by reforming governing regulations

to ensure that the entities strong asset quality and corporate strengths are refl ected

in its risk rating and pricing. Sixth, institute a series of additional measures to

deepen mortgage markets including proactively supporting the diversifi cation of

lenders active in the low- and middle-income market segments. Seventh, incentivize

private developers to produce affordable housing by reorienting support to private

developers, exploring approaches to improve access to developer fi nance, engaging

Perumnas to build structures to engage and share risks with the private developers

to develop under-utilized public land assets.

Rationale

Housing fi nance to help lower income households purchase or build formal houses requires specifi c conditions. Loan tenors

must be as long as possible to make fi nance

affordable, risks created by fl oating interest

rates must be mitigated if income levels are

not suffi cient to cushion their fl uctuations, and

risk management tools and policies must be

available to help lenders manage the additional

credit risk inherent to the target.


The cost of this support is signifi cant, but mostly implicit. For example, SMF has been

endowed with a signifi cant amount of capital and

benefi ts from an implicit government guarantee

since the State is its sole shareholder. FLPP

includes a high subsidy component which can

be estimated at 58% of 20 year loans, or close

to IDR 30 million by housing unit11.

The system is affected by ineffi ciencies, in particular in the case of FLPP. FLPP has

been supporting the same number of units

on average per year since 2010, i.e. 68,000,

as the previous subsidy scheme, despite a

much higher economic cost12. It fell short by

far of the initially planned objective of fi nancing

1,350,000 units in 5 years, or 270,000 annually,

on average. In contrast, the fi xed interest rates

that FLPP initiated on mortgages appear to have

had a positive impact on credit risk according to

the main user of the system, BTN. Yet, a major

coverage gap remains. Most Indonesians that

are informally employed, estimated at around

60% of the workforce, are unable to access

long-term affordable mortgage fi nance13.

SMF is a well-run institution that has helped to

jumpstart a previously non-existent mortgage

secondary market. Its intermediation margin

is reasonable and it enjoys an excellent rating

(AA /AA+). This being said, its ‘market share’

(without securitization transactions) is only

approximately 2% and the company can be

seen as overcapitalized with a low ratio of

loans to total equity of 2.2. Furthermore, the

mortgage insurance offered by Askrindo and

Jamkrindo are conducive to moral hazard, as

the low cost and 100% coverage of the credit

default risk may encourage lenders to relax

their own risk management procedures.

11 This is an economic cost, refl ecting the difference between the government cost of funds and FLPP lending rate, and not a budgetary expenditure.

12 The amount of budgeted subsidies per unit in the previous scheme was IDR 3 million.

13 BTN does lend to independent workers, provided however that they their activity is recorded in formal accounts

Overall, the fairly generous support granted

by the government in the form of attractive

funding and risk transfer has not triggered any

signifi cant interest among mortgage lenders.

Although FLPP has entered in agreement with

25 banks, BTN is responsible for over 90% of its

lending, far above its overall mortgage market

share of 25%. The lack of participation of other

commercial fi nancial institutions acts as a

bottleneck for the outreach of the government’s

assistance14.

On the other hand, demand-side initiatives to

increase access to mortgage fi nance, will not be

successful if there is not an equivalent increase

in the supply of formal affordable housing.

Hence, in parallel to activities to improve

access to mortgage fi nance, measures need to

be taken to stimulate the supply of affordable

formal housing developed by the private real

estate sector.

Approach

A. Improve the Economic and Social effi ciency of Government Support to Deepen the Mortgage Market.

4.1 Develop a Down-Payment Subsidy linked to Mortgage Finance

The under-achievement of the FLPP scheme

is due to several factors: (i) housing price

infl ation; (ii) insuffi cient public allocations, which

have been not only under-calibrated15, but

also irregular, with a sharp decline in 2013 and

2014; and (iii), a very low leverage of private

resources (limited to the 25% of loans fi nanced

by the lenders).

The two latter factors can be addressed by a

change of mechanics: reduce the government

14 BTN’s network represents only 1.5 % of the 19,000 commercial bank offi ces in the country. The partnership increases however its potential outreach (over 3,000 outlets).

15 The initial appropriations implied an allocation of IDR 13 to 16 mln per unit, much below the amount needed


contribution and turn support into a demand-

side subsidy, which would directly benefi t

borrowers and combine with a much larger

amount of credit, which would multiply the

number of households that the system could

serve at the same level of affordability16. This

was the principle of the up-front and buy-down

subsidies schemes previously deployed prior to

2010.

The structuring of a new scheme would

require feasibility studies and cautious design,

in particular to draw the lessons from the

checkered success of the previous program

As an example, a possible scenario for

structuring of the down –payment assistance

could be as following:

The core of the system could be a new

interest buy-down subsidy, coupled with

a buffer against interest rate surges.

An upfront subsidy payment would be

made to participating lenders, for instance,

at the level of a down-payment subsidy,

with the same affordability impact.

This up-front payment would be divided

in two parts: the provision to cover buy-

down interest charges for a certain number

of years –8 years for instance, requiring

an initial contribution of 13.5% and an

allocation to the interest fl uctuations buffer

for the balance (16.5% of the loan).

The buffer would be drawn down when

needed to maintain debt servicing-to

income ratios as constant as possible. At

the end of the coverage period –possibly

longer than the subsidy period itself, any

balance left would be returned by the

lender to the government

16 Simulations show that the subsidy rate per loan is in the range of 25% in the case of down-payment subsidy (depending on income increase) and 10% to15% for buy-down subsidies paid up-front, for20 year mortgages

Using such an approach, the BLU structure

within MPWH would still be useful. If well

designed and operationally set-up, this type of

subsidy should reach a much larger number

of benefi ciaries than the current FLPP (1.5 to

3 times) for the same economic cost to the

government.

4.2 Reform FLPP by shifting to a Limited Liability Structure and Market-Rate Pricing

In the short term, reform the mechanics of

the liquidity support provided under the FLPP

program to increase the number of fi nancial

sector participants and reduce the overall cost

to government, while maintaining long-term

funding for banks and fi xed rate mortgages for

consumers.

Specifi c reforms that are recommended

include reducing the interest rate subsidy to the

lenders by setting the cost of funds at the long-

term government bond rate (currently around

8.5% p.a.). In addition, consider reducing the

“bank co-pay” requirement and altering the

process of funds disbursement to lenders by

confi rming borrower and property eligibility and

transmitting the funds prior to loan closing, in

order to achieve the goal of widening lender

participation and lowering entry barriers,

particularly for smaller fi nancial institutions and

regional banks.

Shift the administration of the liquidity facility to a

regulated fi nancial entity under a limited liability

structure in order to signifi cantly strengthen

program administration and increase control

over loan underwriting and servicing practices.

SMF is recommended as a potential candidate

for this role. Finally, improve the reporting

requirements to put in place stronger controls

for borrower compliance.

Only after these corrective actions are adopted

to strengthen program effi ciency, sustainability

and targeting to low-income households,

should the government consider increasing

fi scal allocation.


4.3 Regulatory and Institutional Strengthening of SMF

One clear factor for the slow development of

SMF’s activity, despite very high loan-to-deposit

ratios that prevail in the banking system (over

90% now overall) is its lack of attractiveness

to lenders as a source of funding. In addition

to the cost differential between capital market

and deposits, SMF is handicapped by an

unfavorable spread of its bonds over SDNs, 200

to 250 basis points, higher than BTN bonds.

Furthermore, the maturity of SMF’s transaction

has declined, to the point to be limited recently

to short term (1 year) refi nancing operations, in

opposition to its core mandate.17.

SMF’s spread does not refl ect the high quality

of its assets (loans to banks collateralized

by mortgages) and its corporate strength

(large equity base, government backing). The

regulatory treatment of its debt in investor

portfolios needs to take into account these

features. Amendments to existing frameworks

should include: (i) relaxed risk concentration

limits in the case of institutional investors; (ii)

low risk weights for capital adequacy purposes

in the case of banks; (iii) eligibility to the repo

operations of Bank Indonesia and (iv) eligibility

to improved liquidity ratios18. The introduction

of the Basel III regime in Indonesia provides

an opportunity for such a change and may

imply that the company be placed under the

oversight of OJK.

4.4 Reform State Guarantees for Housing Finance

FLPP supported loans must be guaranteed by

mortgage insurance, provided by Askrindo and

Jamkrindo. These companies therefore accept

all loans, without adding any soundness criteria

to their eligibility to its coverage. It seems

furthermore that there is little check of the

validity of claims, the vast majority of which are

17 The steep slope of the yield curve between 1 and 5 years of course contributed to this maturity reduction.

18 Including the qualifi cation of the ratio of liquid assets to core deposits-

accepted. This is a matter of concern, since

the credit risk is now entirely transferred to the

government. As such, the existing design of the

guarantee mechanism is conducive to moral

hazard and promotes lenders to relax risk

management practices instead of strengthening

them. If these risks were to materialize, it would

jeopardize for a long time the trend towards a

more inclusive mortgage market.

Government should review the design of

products and the operating procedures of

mortgage guarantors in order to ensure that

loans that they support are based on sound

principles and that adequate recovery actions

are taken by lenders before fi ling claims. This

would limit the government’s contingent liability

and promote sound and hence sustainable

practices in the market. Lowering risk weights

of loans extended under these conditions

would be a signifi cant and economically justifi ed

incentive for lenders to develop guaranteed

lending. Actuarial evaluation of the premiums

needed to cover expected losses should also

be undertaken, even if the resulting pricing is

partially supported by a subsidy.

4.5 Explore Ways to Provide Housing Loans to Informal Sector Households

Excluding this population, which is largely low

income, is a substantial limitation on the actual

impact of housing subsidy programs. A strategy

to expand housing fi nance towards these

categories would include: (i) promoting the

capacity to assess undocumented incomes –

for example, via regularly conducted surveys19;

(ii) supporting savings-for-housing contracts,

which allow banks to check the savings

ability of households prior to borrowing; and

(iii) developing a specifi c guarantee product.

Banks active in the micro-fi nance sector, which

already have a customer base in the informal

sector, should be particularly supported.

19 As part of the policy to strengthen fi nancial inclusion, Bank Indonesia plans to develop the provision of fi nancial data profi les of the unbanked – Financial Stability Review March 2014 p 100.


4.6 Introduce Complementary Measures to Diversify the Mortgage Market

Support the diversifi cation of lenders active in

the low income market segment through three

interrelated measures.

(i) First, provide technical assistance to potential lenders in the affordable mortgage market. Serving lower income

customers requires not only customized

risk management capacity, but also, new

processes to limit the origination and

servicing cost of smaller loans. Assistance

for making organizational adjustments, for

the defi nition of standards and the design of

procedure manuals for the origination and

servicing of mortgages would help lower

entry barriers for the participation of new

institutions in the mortgage sector. Setting

up staff training programs would be also

critical. SMF could be a driver of progress

by helping primary lenders set up all these

operational conditions.

(ii) Second, target incentives to help banks and fi nancial institutions lower operational costs and adjust lending procedures targeting lower-income segments. Entry

in a new and challenging market segment

involves signifi cant investments by potential

lenders – in particular to expand access to

banking services (creating new sale points

in underserved locations, developing low-

cost payment technology, training staff,

developing customized procedures, as

well as information and advising policy).

Such a development does not fi t into

the general strategy of some institutions.

But in the case of others, the roadblock

resides in the cost of related investments.

The government could consider providing

assistance to trainings and development

of new products and systems to fi nancial

institutions that would invest in the low

income market segments. These advisory

services could be provided for a fee, which

could be foregone if verifi able results can be

demonstrated. Tenders could be used to

stimulate interest of new participants in the

use of these advisory services to test new

market segments.

(iii) Third, facilitate the development of new business models. New commercial

approaches can be explored to provide

small mortgages in an economically viable

manner. As an illustration, one approach

that has been successfully tested in some

countries (India, Senegal) relies on the design

and facilitation of standard development

fi nancing models to structure tripartite

arrangements between a group of home-

buyers, a lender and a developer. Potential

demand is aggregated, creditworthiness

of the group members is assessed by the

lender, future borrowers are pre-qualifi ed

and savings are collected. A ’wholesale’

agreement is established with a developer

that develops units to match home-buyers’

needs, in terms of characteristics, location

and prices. Costs are reduced thanks to

an “industrialized” or group approach, and

risks are limited both for the lender and

the developer. MPWH agents in charge of

distributing housing subsidies could play a

role as facilitators of such arrangements.

B. Stimulate Private Sector Supply of Low-Cost Affordable Housing

4.7 Incentivize Private Developers to Build to Affordable Housing

The GoI currently extends a series of tax

incentives under the Rusunami program

including transfer tax reductions from 5% to

1% to developers and VAT tax forgiveness

to buyers as a means to promote affordable

housing production and home ownership.

First, phase out Rusunami tax incentives, which are not suffi ciently robust to drive

production, are not sized to actual household

need and are diffi cult to monitor. Under this

Roadmap, existing Rusunami transfer tax

and VAT incentives will be replaced with the

mortgage-linked, down-payment assistance

mechanisms discussed previously in this

section. These offer greater population and


geographic targeting potential and the ability

to size subsidy according to household need

rather than price point. They will also offer

greater simplicity and direct reporting which

will increase quality of management and real-

time understanding of the production levels

supported.

Second, strengthen the enforcement of inclusionary development requirements in strong markets. Current law requires that new

ownership housing developments include some

units geared toward lower income target groups,

in the 3:2:1 model20. If enforced consistently,

these requirements have the potential to be

major driver of affordable housing production

as well as social and economic integration.

Specifi c methods or modes of enforcement

can be developed by the MPWH or Pokja and

shared with cities, such as additional fi nes

or penalties, cancellation or non-renewal of

construction permits, or additional incentives,

such as developer preferences as partners for

development of public land assets and in public

housing projects.

Third, enhance the mandate and support the institutional strengthening of Perumnas to act as lead developer for bulk housing

production across all typologies and tenures.

Land made available to Perumnas through

the underutilized public land mobilization

program can also be made available to private

developers for low-cost housing production

targeted at the lower-middle class (e.g. deciles 5

to 6), in addition to the supply of core and rental

housing targeted at lower-income groups. This

20 The 1:2:3 rule is a cross-subsidy scheme that requires developers to allocate a percentage of the number of units (or a certain portion of the total land being developed) for middle and low-income housing.

activity will help to support the fi nancial viability

of the program as well as to promote mixed-

income communities and development of the

private real estate sector, as has been the case

with TOKI in Turkey and Al Omrane in Morocco.

4.8 Increase Housing Production by Supporting Developers’ Access to Debt

Indonesian developers currently rely heavily

on their own equity and that of investors to

fi nance land acquisition and construction of

housing units for sale housing. This equity-rich

capital structure limits the ability of developers

to share risk, requires them to demand higher

returns and constrains their ability to produce

units. As a result, their products tend to migrate

‘up-market’ to serve higher income buyers and

renters.

In the interest of increasing production of

housing for those with low and moderate

incomes, the Government of Indonesia could

formulate a limited program to facilitate the

availability of construction fi nancing for housing

developments serving the affordable market

segment, and with a special focus on building

a commercial lending market for permanent

rental housing.

Working with BTN and other willing and

experienced commercial lenders, the

government could carry out the design and

feasibility assessment of different approaches

to extend market-rate construction fi nance

considering the lessons from models

internationally. Support to improve developers’

access to construction fi nance might include

mechanisms such as partial guarantees

of loans or tenant payment streams, loan

participations, interest rate buy-downs and

liquidity mechanisms (expanded in the Case

Studies).


5. Build Robust Delivery Systems

(i) a system of local government accreditation,

based on objective metrics that demonstrate

capacity and performance; (ii) provision of ‘on-

demand’ technical assistance;; and (iii) the use

of performance-based rewards.

Rationale

Central Government has an important role to

play in building the structures and systems

that allow government to be more effective

in the structuring and formulation of housing

policy, with a view to enable and leverage

broader stakeholder participation in policy

implementation. Key characteristics of central

government operating in an enabling role would

include:

1. Create effective tools for developing

and disseminating improved sector

information, by investing in the building

blocks of good housing sector

governance..

2. Enhance inter-ministerial and agency

coordination.

3. Transfer project-level responsibilities to

sub-national governments, specifi cally

urban local governments.

Recommendation

This Roadmap recommends a reorientation of roles and responsibilities in the

implementation of housing policy – including the shifting of central government

line ministry focus from an implementing to enabling role, enhanced mandates for

specialized public entities and an increased role for urban local governments in the

implementation of housing programs.

Central government will lead the development

of national housing policy and programs by

directing state housing budget for decentralized

execution, systematically building the

planning and implementation capacity of local

governments, and maintaining up-to-date

targeting and sector information to develop the

foundations for long-term fl exible and effective

housing policy.

Also at the central government level, this

Roadmap recommends a renewed mandate

for specialized central agencies in the

implementation of housing programs and

associated policies. Specifi cally, the Roadmap

outlines an enhanced role for Perumnas in

low-income land and housing development,

development facilitation and the implementation

of public housing programs. The Roadmap

also recommends a renewed and enhanced

mandate for SMF, Askrindo and Jamkrindo

to enable the development of the affordable

mortgage market.

The Roadmap recommends a shift towards

increased local implementation of housing

programs, particularly in medium and large

cities. This could be done through a progressive

transfer of knowledge, authority, autonomy

and resources to local governments through:


4. Make greater use of non-government

actors, such as private real estate

developers, fi nancial institutions,

professional interest groups, or community

organizations.

Delivery of national housing programs should

use a common approach, with the focus on

supporting the strengthening and transfer of

operational responsibilities to local governments,

while ensuring for the availability of capital

subsidies and implementation support to local

governments. National housing programs

should establish a common framework for

targeting, project development and fi nancing.

However, as housing is fundamentally a ‘place-

based’ activity, national housing programs

should be designed to allow fl exibility to adjust

to local demand characteristics.

Moving towards a decentralized model for the

execution of housing programs is not without

risks and will need to be accompanied by

signifi cant attention to building local capabilities.

Local governments in Indonesia have widely

varying levels of capacity and performance in the

development and implementation of housing

programs, with many local governments

lacking technical, fi scal or institutional capacity

or experience to act effectively.

Striking the right balance between central and

local level responsibility in the execution of

national housing policy should be guided by the

following principles:

Encourage local government innovation

and autonomy while adhering to an overall

consistent central government strategy.

Be proactive and deliver concrete results

in the short-term while building institutions

for the long term.

Experiment, allowing for short-term

‘failures’ while creating a learning base

for long-term cost-effectiveness and

effi ciency.

Approach

Part A: Strengthening and Empowering Local Governments

This Roadmap outlines a path towards

operationalizing the role of urban local

governments as the entities that plan for,

co-fi nance and deliver affordable housing

solutions, while benefi ting from capital

investment and technical assistance from the

central government.

5.1 Develop a System for Local Government Accreditation

MPWH should develop a local government

accreditation program for the implementation

of housing and settlements programs, under

which the central government ranks urban

local governments into three tiers, based on

regularly reported criteria, including technical,

institutional, and fi scal capacity, needs, and

performance. The accreditation program would

focus primarily on city governments, where

housing backlog and new demand is highest.

This accreditation system will be used to

qualify local governments for capacity-

building activities, increasing autonomy and

responsibility in program implementation,

and will also determine the funding balance

(between central and local budgets), and

inform the design of national programs. MPWH

will need a unit responsible for monitoring and

publishing the accreditation on a regular basis.

5.2 Build Capacity of Local Governments

A major component of the accreditation program

is capacity-building of local governments.

MPWH should develop a program of technical

assistance for housing and settlements,

associated with concrete project delivery, that

comprises Standard Operating Procedures,


g u i d e l i n e s ,

t r a i n i n g

m a t e r i a l s 2 1

and templates

for local

governments,

disseminat ion

of information

and capacity-building services. The TAF will

also maintain on-demand support or advisory

services for activities such as project preparation

and implementation of local reforms – acting as

a safety net where local governments are taking

on greater responsibilities in planning, fi nancing

and executing activities.

Participation in the capacity building program

would be entirely voluntary. Local governments

can decide on their participation based on

need and desire to perform. Low-capacity local

governments can be made eligible for additional

grant funding for technical assistance and high-

capacity local governments may need to pay a

fee for these services.

Capacity building activities will meet local

government needs in preparing for executing

different national housing programs, including

slum upgrading, public housing and home

improvement. Specifi c activities may

include awareness-raising and information

dissemination to local governments, regarding

21 Learning modules could be made available either by in-person workshops or web-based trainings.

national programs, development of plans

and strategies (including spatial plans), local

programming and budgeting for housing and

settlements, project preparation, community

consultations, social and environmental

safeguards, structuring of fi nance, project

audits and impact assessments, and

monitoring of the local housing market. Long-

term, where appropriate, the capacity building

program could also provide a pathway for local

governments to develop a local housing agency

(SKPD Perumahan) or Housing Resource

Center.

The proposed capacity building program could

also act as the curator and facilitator of housing

and settlements peer-to-peer learning and

sharing of experiences between different city

governments in Indonesia.

5.3 Design Programs and Allocate Funding with Performance-Based Rewards

The Roadmap recommends the design of

housing program delivery systems and funding

allocation to be linked to the accreditation

and capacity-building of local governments.

Under such an approach, higher-capacity

local governments will receive a larger share of

funding, and will have more fl exibility, autonomy

and local accountability in executing housing

programs. At the same time, low capacity

local governments will be supported and

incentivized through project funding to build

Capital grants andtechnical assistanceare channeled to localgovernments towardcity-led programimplementation

International Benchmark: Local Government Housing Toolkit

New South Wales

New South Wales (NSW) Department of Housing aims to help local governments to use their statutory

powers and resources to improve housing outcomes in their communities. One of the ways the

NSW Department of Housing enabling tools is to build a Local Government Housing Toolkit to help

local councils understand local housing needs and issues to formulate appropriate local responses.

The kit provides step-by-step guidelines for development of an affordable housing strategy. Refer to

Appendices for more details.


their capacity and performance incrementally,

and be rewarded for such buildup by being

provided greater autonomy and resources.

Criteria and conditions of central government

funding allocation for programs can be

determined based on two key factors:

housing needs at the local government level

(as collected and reported by the HREIC) and

local government capacity (as monitored by the

accreditation program).

MPWH should continue to maintain a basic

funding pool for all local governments alike,

regardless of capacity, yet can supplement

this with additional program funding that is

used to incentivize improved accreditation and

performance of local governments. This funding

can initially be allocated on a fi rst-come, fi rst-

served, basis based upon readiness to engage

in immediate housing production. Later,

annual funding rounds22 may reduce emphasis

on readiness (as more local governments

qualify as capable) and increase emphasis on

performance, progress in the implementation of

reforms, impact, and other factors.

In this way, central government can work

towards standardizing and streamlining local

government activities - including planning,

programming of activities, as well as improving

the functioning of local market - by making

implementation of certain reforms23, SOPs, or

trainings a pre-condition for accessing program

funding.

22 Criteria and conditions of funding allocation should be revised on an annual basis to incorporate learnings from programs and shifting national policy objectives.

23 For example, streamlining and increasing transparency of building permits, fast-track approvals for affordable housing that comply with government standards, introducing land value taxation etc.

Part B: Developing the Building Blocks of Effective Housing Policy

5.4 Establish Minimum Housing Standards that are Flexible to Local Conditions

This Roadmap recommends that the MPWH

establish a Task Force to defi ne clear and

fl exible construction standards for the minimum

housing conditions that will be considered

adequate,24 taking into account different

climate, verticality, and housing typology

features. Minimum standards will take into

account regional variations, and will consider the

budget constraints of low-income households,

as well as the public sector, to inform specifi c

government programs. This activity will need the

highest-level commitment so that the minimum

standards are applied across government

actors and housing producers.

During establishment, the Task Force would

need to agree on their role and functions

and create standard operating procedures,

with a vision to reconvene and recalibrate the

minimum housing standards on a regular – likely

annual – basis. Members of the Task Force

would be assigned from relevant Ministries, and

will include voluntary engagement with private

sector associations as well as representatives

from civil society, particularly those who work

with the urban poor.

5.5 Invest in Housing & Settlements Management Information Systems

It is recommended to establish a Housing and

Real Estate Information Center (HREIC), that

could be housed within MPWH, to serve as

a depository of reliable, up-to-date, publicly-

available housing and real estate-related data. Its

principal responsibility will be to design systems

necessary for cities to collect local information

including, for example, basic geo-referenced

data on the location and characteristics of

24 Minimum construction will include construction standards, minimum fl oor plans, mandatory building or apartment amenities and feature etc.


slums and squatter settlements, and also to

collect and aggregate all supply and demand-

related data on Indonesia’s residential housing

markets.

The HREIC can be a stand-alone entity, reporting

to MPWH, or it can be structured in partnership

with other stakeholders, for example, Bank

Indonesia’s Real Estate Sector Division (which

currently reports on and maintains a Home Price

Index), housing-related SOEs, including SMF,

BTN and Perumnas, or the private real estate

associations (REI and APERSI). The HREIC can

carry out its own surveys and also inform the

questions used by BPS in the Susenas survey

and national census.

Improved information systems will deepen

knowledge of the housing market and

household profi les and needs, which in turn

will strengthen public housing program design

and revisions. Also, more transparent, reliable

and up-to-date data will help to remove market

failures and uncertainties. This can positively

impact the effi ciency of the private market – for

real estate developers, banks, investors, NGOs

and interested stakeholders – reducing room

for patronage and graft, reducing costs, and

removing barriers to new entrants or smaller

actors with limited ability to manage data

uncertainty.

5.6 Build an Effective Housing Affordability and Targeting System

Getting the targeting right is an essential pre-

requisite for the success of any program and

an extremely important mechanism to ensure

that public spending reaches the poorest.

MPHW should conduct ongoing targeting and

affordability studies to guide housing sector

policies and programs. Under the HREIC, the

MPWH can establish or designate a research

and analysis unit that would be responsible for

ongoing affordability analysis and strategizing

for subsidy targeting, based on needs and

priorities, so that policies can be regularly

updated in line with changes in market

dynamics.

Development of an income or consumption-

based targeting system could improve effi ciency

of public spending, by creating transparent

eligibility and qualifi cation of benefi ciaries across

programs. Flat or progressive demand-side

subsidies could be introduced for incremental

housing program or as down-payment

assistance in the redesigned FLPP program,

building off an enhanced targeting system.

Where possible, this system should further

expand local governments capacity in targeting

and benefi ciary selection, and utilize existing

central government infrastructure. For the

bottom 40%, the TNP2K, an integrated

database of Indonesian households used for

the targeting of social assistance programs

should be used. This will allow the government

to maximize synergies with other central

government assistance programs and not to

create replication or a parallel system.

5.7 Elevate the role of Pokja as Lead Housing Reform Coordinating Body

The Inter-Ministerial Committee for Housing

and Settlements or Pokja PKP, has already

become an important platform for coordinating,

discussing and informing decisions on housing

policy and program development, across

central level ministries and agencies.

The role of the Pokja could be further

developed by elevating its mandate to become

the entity that is responsible for implementation

of the Roadmap, including the necessary

coordination, review and quality control of

activities, as well as putting in place a specifi c

work program that formally outlines a set of

technical tasks that are needed to prepare and

deliver the actions of the Roadmap.

These activities could include validation of the

policy reform agenda and consensus-building

amongst central-level agencies, review of the

regulatory environment to identify necessary

national-level reforms in coordination with the

design and development of new programs,

specialist activities, such as defi nition of fl exible


housing standards and legal mechanisms

available to recognize informal settlements,

as well as exploring means to strengthen

enforcement of regulations, among other

activities.

5.8 Support the Development of Network of Real Estate Professionals

Develop a system for registration and

qualifi cation of real estate professionals

through a Builder’s Council dedicated to the

industry of residential property development,

to help establish and enforce developer quality

standards.

This council could pre-qualify private sector

actors for government housing programs,

based on criteria developed with MPWH,

provide input into government’s minimum

construction standards and design of programs

and delivery systems, and help to report on

housing-related statistics to complement those

being produced by government. The council

would formally recognize and work across

REI, APERSI and non-members, qualifying

developers based on performance and merits.

The council would also play an important role in

self-governance, holding members responsible

for meeting performance and ethical (anti-

corruption) standards and expelling any fi rm or

individual violating these standards.

This council would also facilitate peer-to-peer

professional learning and networking, conduct

certifi cation of entities and professional

executives, prepare and carry out trainings to

develop technical capacities in Indonesia’s real

estate sector, support new market entrants

and small contractors, and create a network

of housing professionals. These trainings could

cover technical modules in land acquisition

and development, site design, construction

techniques, development fi nancing, sales

and marketing and procedures for long-term

property management.


6. Mobilize Urban Land for Settlements

real estate market characterized by high and

rising speculative land prices. This Roadmap

emphasizes the use of alternative strategies.

Government slum upgrading, infrastructure and

housing programs currently operate under a de-

facto prohibition from investing in informal slum

areas. Certain informal slum areas are located in

areas reserved for public infrastructure, subject

to hazard risk or on private land in violation of

clear tenure rights. In these cases, government

will need to relocate communities to affordable

public housing. However, relocation is an

expensive and challenging solution for all slum

areas and a large number of informal slums are

located in areas where the case for relocation

is less compelling. In such cases, in order to

meet the objective of universal slum alleviation,

GoI will need to encourage regulatory reform

at the central and local levels to ensure that,

at minimum, basic services can be extended

to all informal slums and, in the best case, to

regularize longstanding slum areas.

This Roadmap outlines an ambitious agenda

for the expansion and provision of core starter

units, public rental housing and the release

of land for lower-income market rate housing

Recommendation

In the short term, build a strategy to support local governments to recognize and/or regularize tenure of informal settlements for slum alleviation and provision of services.

Also, in the short term, support land assembly by creating a framework to identify unused, or under-utilized, state-owned and waqaf land assets and make land available for new low-income housing projects.

In the medium term, strengthen local governments to improve local land management systems (including land-use zoning and spatial planning, permitting, valuation and taxation, and cadastre and registration) and develop a range of methods to develop

private sector land, such as land-sharing, land readjustment and consolidation.

Rationale

The rapid growth of urban areas in Indonesia

has increased pressure on land in urban and

peri-urban areas. Private developers and

investors have acquired large land banks for

speculative purposes which, together with

a failure of formal sector supply to keep up

with demand, has forced up prices of well-

located and serviced land dramatically over the

last three years. As a result, land is no longer

affordable to the poor and even many middle-

income groups in many urban agglomerations.

Government will

need to secure urban

and peri-urban land

to implement the

proposed housing

and settlement

programs, including

slum improvement,

incremental new housing and formal subsidized

housing programs. Securing or releasing such

land to market is challenging and will require a

range of strategies in the short and medium-

term. Acquiring or banking land can prove

extremely costly in Indonesia’s current urban

An estimated 15,000 to 60,000 hectares of urban land is required annually for housing needs


production. The government will need to deploy

a mix of proactive and enabling strategies to

overcome rigidities in urban land markets.

In the short-term, this Roadmap outlines a

program of government-enabled land provision

form existing public inventories including those

held by central government, SOEs, municipal

and in waqaf trusts. In the medium-term, the

local government will need to build capacity

and mobilize a range of strategies including

property taxation, inclusionary zoning and

enforcement, and land readjustment, amongst

others, to ensure the continued adequate

supply of affordable land for housing.

Approach

6.1 Develop a National Land for Housing Program to Assist Low-Cost Housing Delivery

Create a National Land for Housing Program,

for land provision to support the implementation

of national housing programs, supported by

appropriate regulation and managed by a

high-level supervisory board. Land provisioning

would aim to mobilize publicly-controlled land

assets for public and affordable housing, without

requiring complex and costly acquisition of

land by one central agency. A program design,

oversight and an implementing agent will need

to be established. Various points of entry are

feasible, including a BLU entity within MPWH,

a BLU within BPN, a new agency staffed from

different ministries with a time bound mandate,

or a Cross-Ministerial Special Unit. Irrespective

of where the entity is located, it will be important

to ensure a clear mandate for the entity through

either presidential or ministerial regulations.

The functions of such a program – and the

scope of the mandate to be provided the

implementing entity – could include:

Prepare Land Needs Assessments for

local governments at current density

norms and estimated needs to: (i)

relocate settlements not suitable for

in-situ upgrading; (ii) address existing

backlog; and (iii) accommodate projected

population increase.

Carry out an inventory and identifi cation

of developable public land (including

land owned by local governments, line

ministries, SOEs, and other public/semi-

public entities, waqaf land, etc.) and

prepare valuations.

Reach agreement under the framework

of enabling regulations with each entity

owning land holdings identifi ed as

appropriate for housing, on the terms

and conditions for the release and

development of their land, including any

special conditions on which land-owners

offer land.

Negotiate and complete legal agreements

with current landowners.

Negotiate early release of land by owner

and duration of allocation.

Develop business plan for use of land,

fi rst for MPWH products such as public

rental housing, core starter units and

slum upgrading and later for more

complex arrangements including land

consolidation, redevelopment, transfer,

mixed-use public-private partnerships,

making clear the role for local governments.

Coordinate with local governments for

provision of required trunk infrastructure.

Prepare land for release and development.

Release land for slum upgrading (through

fl exible forms of tenure, e.g. lease or user

rights, to existing slum dwellers) or to

Perumnas for new housing development

(in the short term).

Ensure that low-income communities25

receive adequate lease or user rights.

Consideration could be given to encouraging,

or requiring, local governments and SOEs that

want to sell land to offer it as a fi rst option to a

housing authority before offering it to the private

sector. This may require the development of

clearer land release protocols or regulations to

ensure that the conditions of land release are

transparent and that land prices are fairly set

between the agencies involved in each case.

For SOEs that prefer to keep land as part of

their asset portfolio, this may require high-level

legal or regulatory backing.

25 Options may include medium term communal leases or short-term (5-10 years) individual leases. These may be renewable or upgradable, but may require changes in current tenure regulations.


6.2 Regularize Tenure for Investment in Informal Settlements

Overcoming the legal constraint that restricts

investment and basic service provision in the

full range of informal settlements, including

squatter areas, is a national priority. Developing

instruments that can be used to secure tenure

for slum dwellers is important to enable GoI

to address different types of urban slums and

informality.

Informal settlements located on state-owned

land may be able to use the Land for Housing

Program to regularize tenure and be provided

with communal or individual leases, especially

where parcels are not under dispute, in

conjunction with slum upgrading and home

improvement programs. The Land Law

provides for local governments to grant land

rights for those parcels peacefully occupied for

more than 20 years without contest, yet this

tool is not often used by local governments. For

others, different solutions, such as communal

leases, will need to be applied in granting

formal tenure for those slums on private land

and those on government land. In all cases,

active community participation is necessary in

formulating and implementing proposals.

A task force or

committee should

be established

by the Pokja that

will identify the

existing barriers

to investment

in informal

settlements and

develop a strategy

to help local

governments to recognize and regularize

informal settlements to make them eligible for

the slum upgrading program. This committee

should also propose which high-level national

law or regulation changes need to occur to

facilitate this process.

6.3 Strengthen Local Government Regulatory Systems for Land Management

Many land-related regulations are controlled by

local governments. These tools can be used to

improve land supply and land management for

low-income housing, which can be developed

with central government support26.

(i) Spatial Plans, Zoning and Permitting. Spatial plans can be better used to designate

land specifi cally for low-income housing use,

and enforcing the plans to ensure that land

thus designated is only used for low-income

housing, and no permits are provided for this

land to be used for any other purpose. This

would require:

Detailed zoning plans (RDTR) to be

coordinated and aligned with broader

spatial plans (RP3KP) and low-income

housing zones (R8) to be clearly marked in

each of the appropriate plans. To achieve

this, the spatial planning committee at

the national level (BKPRN) would need to

give clear instruction to the local spatial

planning committees to review and align

existing plans (RP3KP, RTRW and RDTR)

and to require plans to include low-income

housing zones.

Amend Law 2/2012, regulation 17/2012 to

include the submission of business plans

with development permit applications

and require implementation of the plans

according to the timeline. If land owners/

developers do not comply within a fi xed

period of time (e.g. three years), their land

can be repossessed and developed for

low-income housing and other priority

uses. At the moment, the three year

clause is by decree of the Minister of BPN,

but is not backed by a law or a regulation.

Develop necessary regulations to enable

local governments to enforce the 1:2:3 rule

for residential developments27. Empower

or strengthen local governments so they

can enforce permit regulations and do

not renew permits unless substantial

development has taken place within the

26 A good land information system is a key precondition in providing land for low income communities. Undisclosed land information leaves room for land to be appropriated by property speculators to the detriment of the poor. Planning for urban housing and infrastructure is diffi cult without transparent land information and management systems,.


Local governments have a major role to play in the use of spatial planning and tax instruments to mobilize private land for low-income housing


stipulated period and unless the low- and

middle-income housing requirements are

met.

When converting land from rural to urban,

reserve areas for low-income housing.

(ii) Registration and Permitting Procedures. Current processes to transfer land ownership

(BPN) and obtain building permits (local

government) are bureaucratic, increase costs

and impede good urban governance. ‘One

Stop Shops’ which specify all procedures and

costs and are subject to external oversight

can improve registration rates; and they can

facilitate a shift to e-permitting/e-registration

systems. BPN can cooperate with local

governments to build this integrated system

of land administration and development

permit procedures, perhaps starting fi rst with

expedited systems for low-income housing

development.

(iii)Taxation. Local governments are

responsible for several local taxes, including

the property tax (which is a combination of land

and building taxes) and transfer taxes that can

be used to get speculators to release more land

into the market and to make land transactions

more transparent. For example:

Shifting to land value taxation is an effective

means to bring land into productive use,

reduce the market price and increase

public revenues28.

Levying taxes on land left vacant is a fi scal

instrument that city governments can

use to discourage land speculation and

28 A land tax is simple to assess and collect. However, a building tax discourages land improvements (i.e. construction/property development), providing greater incentives for speculators to hold onto banked land without developing it. Transfer taxes incentivize under-reporting Introducing land value taxation gradually can allow markets to adjust to the new tax and create more transparent and equitable land markets. It will be essential to de-link locally generated revenues from the DAU allocations from central government before this can commence, as the current DAU allocations are inversely related to locally generated revenues.

ensure a steady supply of developed land.

Reducing or eliminating transfer taxes is

a simple means to discourage current

under-reporting of market values and

improve registration and is currently under

consideration.

6.4 Explore Alternative Strategies to Assemble Urban Land for Housing

Over the medium and long-term, GoI will

need to diversify its strategies to facilitate

land assembly for affordable housing delivery.

Otherwise, the current stock of public land

assets will eventually become depleted, given

the large need for developable land every year.

Strategies may include:

Land Sharing. Consider using a land

sharing approach with private sector

land-owners in order to share windfalls

of administrative actions and public

investment and to acquire land at zero

cost.

Consider land consolidation/readjustment

strategies29 combined with exactions for

public-purposes (i.e. land for amenities

and affordable housing).

Invest in transportation infrastructure as a

surrogate for expanding land supply.

29 Land pooling and land readjustment has been exercised by the Ministry of Public Works in the early 1990s through the Guided Land Development (GLD) Program undertaken in the peri-urban areas of Jabodetabek urban agglomeration (Jakarta-Bogor-Depok-Tangerang-Bekasi). Because of inadequate coordination among relevant government agencies, particularly BPN-MoPW-LG, it has not been fully successful. Further workshops in Bandung and Jakarta assessed the issue but did not lead to further action. Therefore, it is recommended that incentives and disincentives for collective action between different government bodies and private stakeholders need to be designed carefully.



55 07 | Roadmap Implementation

Roadmap Implementation

To move forward on each of these policy priorities, the following diagram lays out

the series of actions that the government will need to take, in the Immediate, Short

Term and Medium Term.

Priority Immediate Actions6-12 month

Short Term Actions 1-2 years

Medium Term Ac-tions3-5 years

Slum Upgrading Design the frameworks for

a national program on com-

prehensive slum upgrading.

Launch slum upgrading

program on an on-de-

mand basis with cities.

Scale national pro-

gram to all cities and

slum areas through-

out Indonesia.

Subsidized Housing Reformulate public housing

toward alternative ten-

ures and typologies. This

includes detailed design of

programs for core/row and

public rental housing, with

an expanding LG role, a

detailed strategy to revital-

ize Perumnas, and utilize

public land assets.

Roll-out and increase

investment in subsidized

housing programs,

improve calibration of

subsidies and increase

private sector and LG

participation.

Introduce further

market reforms and

measures that in-

crease private sector

incentives to develop

and manage public

housing.

Home Improvement Strengthen delivery of

existing home improvement

subsidy program (BSPS)

and introduce a greater

urban-focus.

Build up systems and

capacity to execute and

integrate subsidy with

slum upgrading and new

green-fi eld incremental

development.

Fine-tune the pro-

grams and scale them

nation-wide. Facilitate

development of and

crowding in of hous-

ing microfi nance.

07


Priority Immediate Actions6-12 month

Short Term Actions 1-2 years

Medium Term Ac-tions3-5 years

Enable Market Reorient FLPP onto

market-based principles

and design a mortgage-

linked demand /down pay-

ment assistance program.

Remove tax incentives

and review measures to

increase private sector sup-

ply of low-cost housing.

Fully transition to a

demand subsidy and

market-based liquid-

ity support, includ-

ing strengthening of

mortgage insurance and

SMF. Explore access

to developer fi nance to

stimulate low-cost hous-

ing supply.

Introduce a suite of

associated market-

enabling reforms to

deepen mortgage

markets and support

real estate develop-

ers increase supply

of low-cost affordable

housing.

Delivery Systems Design local government

accreditation and capacity-

building program. Carry out

detailed affordability and

targeting assessment and

design plan to implement

a housing management

information systems.

Launch LG capacity-

building in coordina-

tion with the roll-out of

housing programs and

monitor performance.

Invest in setting up the

Housing MIS and sys-

tems for monitoring and

evaluation of housing

policy.

Transfer funds and

responsibility for

execution of housing

policy to LGs based

on performance and

capacity. Recalibrate

and update MIS and

targeting on a regular

basis.

Urban Land Design processes to (i)

secure under-utilized public

land assets for settlements

and (ii) recognize and/or

regularize tenure of house-

holds in slum areas.

Launch the national

Land for Housing

program, empowering

a national land provi-

sion entity as execut-

ing agent, and design

technical assistance to

develop LG land man-

agement systems.

Continue to build

LG capacity in land

management and

provision.

57 | Annexes


59 | Annexes

Annexes

1. Principles of Housing Policy Reform

The following are some key principles that have guided the formulation of the policy recommendations

for the Housing Policy Reform Roadmap.

a. Housing is a basic human need and right. Every Indonesian shares the right to a decent

standard of living. Housing that provides a basic level of privacy, security and shelter, as well as

access to infrastructure, livelihood opportunities, and social services, is essential to achieving

this standard. The government plays an important role in realizing the right to adequate housing

for its citizens by supporting the provision of affordable housing.

b. Space for the poor needs to be provided in the city. The poor make a substantial

contribution to the economic and social development of cities. Land and housing for the urban

poor must provide access to livelihoods and social infrastructure that refl ects their needs in

terms of location, form and cost, so that they can continue to make a positive contribution to

a city’s well-being and development.

c. Guarantee security of tenure of every citizen. Development should occur without

uncompensated eviction. Secure land tenure and protection from arbitrary eviction is a basic

requirement for creating a decent living environment and should be guaranteed to every

citizen. The poor need protection from eviction without acceptable alternative housing and

compensation.

d. Central government should act as enabler. The most effective role for government is to

regulate and facilitate land and housing markets to better serve the public interest, not act as a

general supplier of housing. The exception is when government allocates public land for social

uses and provides direct assistance to the lowest income households that are not served

by the market. In this role, government directs policies, regulatory instruments and public

investments towards ensuring that secure, well-located land is available for the urban poor,

that all citizens have access to basic services, and that housing is of decent quality.


e. Local governments to take an active role. Local governments are in an important position of

direct accountability and responsibility to local residents to develop and execute development

plans, monitor demographic and growth dynamics and respond to the public service needs

of their residents. As such, local governments should be actively involved in the design and

implementation of national housing policy and programs. In turn, these policies should be

fl exible enough so that they can be reshaped in response to local needs and regional variations.

f. Community participation. Community participation is key to the success and sustainability

of housing and settlement programs. Community participation should be part of the planning,

programming, design, implementation and supervision of activities. This will ensure that the

results of housing and settlement programs satisfy the needs of the community and that there

is sense of local ownership and responsibility toward maintaining healthy neighborhoods.

g. An integrated approach to settlement development. Adequate housing and settlements

require addressing a wide range of issues such as physical planning, quality of construction,

infrastructure provision, access to social services (e.g. healthcare, education and community

facilities), and access to jobs. Therefore, it is important to work towards enabling an integrated,

multi-sectoral approach to housing policy, whereby public transportation, provision of services,

spatial planning and project development are coordinated.

h. Housing and settlements should be integrated with broader city development. New

and existing settlement areas defi ne the development patterns and long term outcomes of

cities. Yet, slum areas are currently excluded from spatial planning considerations and housing

projects are often viewed as peripheral to city development. Investment in new housing and

slum alleviation should be included in urban spatial planning and management.

61 | Annexes

2. Target Population and Affordability

Summary

Appropriate targeting is an essential pre-requisite to effective and equitable public spending. It is important that the government maintains up-to-date and reliable information on

housing needs and affordability, and builds a clear system for defi ning and reaching the target

population with housing policy and programs.

Beyond national characteristics, there are diverse regional variations in housing markets. For

example, there are different building materials and techniques that are considered adequate and

the cost of construction varies based on location. The cost of a bag of cement is approximately

US$150 in Papua or 25 times the cost of a bag of cement in Java. Also, household incomes and

tenure preferences vary widely, requiring different solutions. For example, there is high demand for

vertical rental housing amongst middle-income households in larger cities and industrial centers,

while households in smaller urban centers and rural settlements prefer low-rise solutions.

The Roadmap recommends that the MPWH clearly defi ne the criteria to determine the housing

defi cit, as well as develop systems for affordability and targeting of government support in the

housing sector. This system should utilize existing information and data, which is regularly collected

by BPS, as well as take into account geographic variations and local market particularities. This

housing market information should be reported broadly (readily accessible to both the public

and private sectors) on an annual basis and be used to inform program development, budget

allocation, and targeting of subsidies.

Housing Stock and Housing Defi cit

Total housing stock is estimated at 64.1 million units. The home ownership rate is high in Indonesia,

at around 82% of households. The housing defi cit is a ratio that should refl ect both quantitative

defi cit and qualitative defi cit. The defi cit fi gures that are frequently reported relate to the number

of households that do not own a home, which was measured at 11.9 million households in 2010,

and is estimated to have increased to 13.5 million by 2014, or around 20% of the 64.1 million

units.


Figure 1. Household Ownership Rate per Decile.

30%

50%

70%

90%

12 34 56 78 91 0

National Urban Jakarta

Source: BPS Susenas, 2013.”

However, this number is misleading

as is shown by Figure 1, where

home ownership is shown to be

lower for higher decile households.

Thus, the reported defi cit lies with

the high-income households rather

than low-income. The fi gure also

fails to take into account renters or

lessees who may not wish to own

due to lifestyle preferences as well

as families in overcrowded units who

would like to own but cannot. This

defi nition needs to be fi ne-tuned to

address the following additional

characteristics:

1. Families living in a single household who may wish to own but cannot due to affordability

reasons.

2. Non-Owners (renters, lessees etc.) who may not wish to own due to lifestyle preferences.

3. Units that are defi ned as substandard housing.

It is recommended that the BPS include a few additional survey questions in future Susenas and

the next census to further calibrate the quantitative defi cit ratio so that it better aligns with home

ownership desire and need.

Box 1. International Example of Housing Defi cit In Latin America

In Latin America, as in most places, the housing defi cit has two critical aspects: First, there

is a shortage of housing for those households who want to own housing units – this is the

quantitative housing defi cit. Second, many households live in poor conditions – this is the

qualitative defi cit. The existence of a qualitative housing defi cit means that many people

share overcrowded accommodation or live in shelter lacking satisfactory basic services such

as water, sanitation and electricity. In the poorest countries, the combined housing defi cit,

quantitative and qualitative, is actually greater than the total existing housing stock. An

example of housing defi cit in Colombia is as follows:

Quantitative Qualitative Total Defi cit

1985 14% 33% 49%

2005 12% 24% 36%

Source: “Ten Myths Underpinning Latin American Housing Policies” by Alan Gilbert

The calculation of qualitative housing defi cit is challenging as there is no global defi nition to be

used. The Roadmap strongly recommends establishing a clear defi nition of substandard housing.

To do so, MPWH can use a combination of the following existing indicators being captured by

BPS Susenas:

63 | Annexes

(a) Overcrowding effect (currently defi ned as < 7.2m2 per capita).

(b) Lack of standard utilities – water, sanitation, and/or electricity.

(c) Substandard construction materials for fl oor, walls and roof (e.g. for roof, substandard materials

have been defi ned as asbestos and fi ber/palm; substandard walls can be defi ned as wood and

bamboo; and an earthen fl oor is considered substandard).

Current measures indicate that 45% of existing homes or 28.9 million units are substandard in

one of these factors, e.g., are constructed of one substandard housing material, do not have

access to water or sanitation, or are overcrowded. This ranges from 63% for Decile 1 households

to 19% of Decile 10 households. Using a combination of these factors can radically shift the

estimate of defi cits. Table 1 and Figure 2 shows the primary factors that contribute to the housing

quantitative defi cit, which has been extrapolated from the BPS 2013 Susenas survey and divided

into household expenditure deciles.

Figure 2. Number of Housing Units with Various Substandard Characteristics

12 34 56 78 91 0

Decile

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

No.

of U

nits

OvercrowdedNo basic servicesAll poor quality materials

Overcrowded and no basicservices

Overcrowded and no basicservices and poor qualitymaterials

Overcrowded and no basicservices and no poor qualitymaterials

No basic services or poormaterials

Overcrowded or no basicservices or poor quality

Source: BPS Susenas, 2013.


Tab

le 1

. P

erce

ntag

e o

f H

ous

ing

Uni

ts w

ith V

ario

us S

ubst

and

ard

Cha

ract

eris

tics

Nat

ionw

ide

Ove

rcro

wd

ing

Lack

of

Bas

ic U

tiliti

esS

ubst

and

ard

Co

nstr

uctio

n M

ater

ials

Co

mb

inat

ion

of

Sub

stan

dar

d C

hara

cter

istic

s

Decile

<7.2

m2

No W

ate

rN

o

Sanitation

No W

ate

r &

Sanitation

Roof

Wall

Flo

or

All

Sub

-

sta

nd

ard

Overc

row

ded

or

No B

asic

Utilit

ies o

r

Sub

sta

nd

ard

Mate

rial

Overc

row

ded

and

No B

asic

Utilit

ies a

nd

Sub

sta

nd

ard

Mate

rial

127%

27%

61%

22%

12%

19%

22%

4%

69%

7%

219%

21%

51%

16%

9%

16%

16%

2%

60%

4%

315%

18%

46%

13%

9%

14%

13%

2%

55%

2%

413%

16%

43%

12%

8%

11%

10%

1%

51%

1%

512%

14%

38%

9%

9%

8%

9%

1%

48%

1%

68%

12%

32%

8%

9%

8%

7%

1%

42%

1%

78%

11%

29%

7%

10%

7%

6%

1%

40%

0%

87%

8%

22%

5%

10%

4%

4%

0%

35%

0%

95%

6%

16%

3%

10%

3%

2%

0%

29%

0%

10

3%

3%

9%

1%

10%

1%

1%

0%

21%

0%

Tota

l12

%14

%35

%10

%10

%9%

9%1%

45%

2%

No

. of

Uni

ts 7

,543

,340

8,

758,

632

22,

316,

246

6,26

6,01

2 6,

125,

329

5,85

2,23

3 5,

804,

551

785

,497

2

8,91

5,89

4 1

,112

,974

Cha

ract

eris

tics

of

Ind

one

sia’

s H

ous

ing

Nee

ds

National housin

g n

eed

s a

re d

iffi c

ult t

o d

ete

rmin

e w

ith a

ccura

cy.

This

resp

onsib

ility

best

lies w

ith r

egio

nal and

local govern

ments

, w

ho c

an b

e

resp

onsib

le for

und

ert

akin

g s

pecifi

c h

ousin

g n

eed

assessm

ents

and

sett

ing r

egio

nal a

nd

local h

ousin

g d

evelo

pm

ent ta

rgets

. U

sin

g p

op

ula

tion

gro

wth

, m

igra

tion a

nd

defi c

it e

stim

ate

s,

national govern

ment

can p

rovid

e m

inim

um

and

maxim

um

estim

ate

s for

the h

ousin

g n

eed

s t

o info

rm

national p

rogra

m d

esig

n a

nd

national b

ud

get

allo

cation.

In Ind

onesia

, alm

ost all

pop

ula

tion g

row

th is

occurr

ing in

urb

an a

reas, w

hile

gro

wth

in rura

l are

as is

sta

gnating. O

ver 34 m

illio

n resid

ents

moved

to c

itie

s in

the p

ast

10 y

ears

resultin

g in

a t

ota

l incre

ase o

f 8.2

millio

n u

rban h

ousehold

s. M

eanw

hile

the r

ura

l pop

ula

tion h

as d

ecre

ased

by 2

.1

millio

n o

r aro

und

510,0

00 h

ousehold

s in t

he p

ast

10 y

ears

(see F

igure

3).

65 | Annexes

Figure 3. Ten Year Growth Trends in Indonesia (2004 – 2013)

8,200,000

34,000,000

3%

-510,000

-2,100,000

-0.17%Avg. Annual Rural Growth (%)

Change in Rural Population (residents)

Total Change in No. Rural Households

Avg. Annual Urban Growth (%)

Change in Urban Population (residents)

Total Change in No. Urban Households

Source: World Bank Databank, 2014.

The housing needs are diverse – units in rural areas suffer disproportionately from qualitative defi cit

(substandard materials and/or no access to basic services), while housing needs in urban areas

are mainly part of the quantitative defi cit and suffer particularly from over-crowding, indicating the

need for new production.

Current production of formal units is estimated to be in the order of 400,000 units per year. To

overcome the defi cit, total production of new units and home improvement solutions will need to

increase to an estimated 1.8 to 3.6 million units per year. This estimate is based on the following

components:

1. Growth in urban population ranges from 2.6% to 2.9% per year, requiring an estimated 820,000

to 920,000 new urban housing units every year in order to accommodate new household

formation.

2. Home improvement or new production to overcome the defi cit of inadequate units in both rural

and urban areas. This requires additional production of between 900,000 and 2.7 million units

or home improvement solutions per year, depending on estimates for the current defi cit (see

Table 2) and time span to entirely eliminate the defi cit (by 2019, 2024 or 2029).

Table 2. Various Estimates of Overall Housing Defi cit

Defi cit Estimates Classifi cation Total Units Annual Need to Reduce

Backlog by 2019

Low Estimate Only slum households 3.9 million 780,000

Middle Estimate Only overcrowded units 7.5 million 1,500,000

High Estimate Non-home ownership, reported

by BPS and MPWH

13.5 million 2,700,000


Of the total need, the top 20 percent of households are capable of purchasing in the formal

market (see affordability section). This leaves 1.6 to 3.2 million households per year that need

housing support through an enabling fi nancial environment or specifi c public programs. Some

units can be made adequate through home improvement or incremental home expansion. An

estimated 12.2% of urban residents or 3.9 million households live in slums requiring upgrading,

in-situ redevelopment, or relocation. In addition, there are non-slum households that require new

housing due to internal migration or population growth. This will require the production of low-cost

formal housing, as well as affordable housing fi nance. Table 3 illustrates certain characteristics of

the estimated housing needs according to income decile.


Table 3. Characteristics of Indonesia’s Estimated Housing Need

Target

Groups

Annual Need

to Address

Housing

Defi cit by

2019

Annual Need

to Address

Housing Defi cit

by 2024

Annual Need

to Address

Housing Defi cit

by 2029

Objectives Example of

Policy Solution

Slum Units780,000 units 390,000 units 260,000 units 0% Slums

Slum upgrading

and home

improvement

subsidies.

Decile 1-4

(Non-Slum

Households)

1.20 m units 780,000 units 650,000 units

Prevent

formation of

new slums,

increase supply

of affordable

formal housing

solutions.

New subsidized

public rental

and core starter

units.

Decile 5-8 1.25 m units 810,000 units 660,000 units

Increase supply

of low-cost

housing to

reduce backlog

and meet new

demand.

Introduce

more effective

mortgage-linked

subsidy scheme

to enhance

affordability.

Decile 9-10 390,000 units 290,000 units 250,000 units

Enable formal

housing market

to work.

Support

secondary

mortgage market

development.

Total 3.6 million/yr 2.3 million/yr 1.8 million/yr

Source: Authors’ Calculations.

Actual fi gures may be signifi cantly different from these estimates, depending on the assumptions

and statistical measures used. Variations may be caused by the following factors:

1. The model assumes that demand for new units are equally distributed among deciles. However,

new household formation tends to be biased towards the middle and lower income deciles.

Demographic analysis show that low-income households tend to have larger families and

rural-to-urban migrants tend to be lower income.

2. The spread of the housing defi cit across deciles is based on average spread of the basic

substandard characteristics30. However, certain characteristics may be more heavily

concentrated in lower decile households or vice versa, which would require more complex

segmentation techniques.

3. Lastly, even though income in slums is heterogeneous, the assumption is that the majority of

the current slum population is expected to be poor or ultra poor (Decile 1 – 4).

The goal of the Roadmap is not to defi ne the precise numbers. Instead, given the undisputed

magnitude of the need, its priority is identifying areas for action and improving the effi ciency and

equity of the policy framework.

30 On average, Decile 1-4 households make up 60% of substandard units, hence qualitative backlog, Decile 5-8 households make up 33% of the qualitative backlog; and Decile 9-10 make up 7% of the qualitative backlog.

67 | Annexes

Housing Incomes and Housing Affordability

Household consumption expenditures are measured by BPS in the Susenas Living Standards Survey, which is conducted quarterly. Using this information, households can be

divided into expenditure deciles to provide an indication of well-being and affordability of services.

On average, Indonesian consumers spend IDR 2.9 million per month on all types of expenditures

(including household, food and non-food related expenditures). There are substantial regional

variations with respect to urban household expenditures and income. The median monthly

household expenditures for Jakarta is more than twice the national average, given the higher cost

of living, as shown by Figure 4.

Figure 4. Average Monthly Household Expenditures, by Decile and by Geography

Monthly HH Expenditures by Decile

(IDR, million)

Decile Mo. HH Expenditures

1 1.17

1.52 1.42

3 1.59

4 1.83

5 2.06

2.66 2.35

7 2.66

8 3.21

9 4.266.2

10 8.20

Avg 2.88

Monthly HH Expenditures By Geography

(IDR, million)

Jakarta

Urban

Nasional

IDR 5.99 MM

IDR 3.64 MM

IDR 2.88 MM

The Susenas Survey also records existing spending on housing. The Imputed Housing

and Housing Related expenditures31 as a percentage of total household expenditures gives an

indication of the share of their total expenditures that households from different deciles are willing to

allocate toward housing. Lower decile households tend to have less income available for housing,

as they must spend a larger proportion on essential goods like water, food and transport. In the

case of Indonesia, nationally households allocate 19% of their total expenditures, on average,

to housing. This ranges from 32% for Decile 10 households to 15% for Decile 1-4 households,

refl ecting international studies that show that poorer households have a much lower share of

income available for spending on housing. While the imputed housing cost refl ects more the

affordability of rentals rather than that of home ownership, this housing indicator is an important

ratio to track.

Table 4. Imputed Housing and Housing Related Expenditures as a Percentage of Total Household Expenditure

As a % of Household Expenditures National Urban Jakarta

Imputed Housing & Housing Related Cost: 19% 21% 25%

Imputed Housing Cost: 11% 12% 15%

Maintenance & Utilities Cost: 8% 9% 10%


31 Imputed Housing Expenditures = Actual rental/lease cost for renters/lessees OR imputed rental cost for homeowners or those who receive free rental. Housing Related Expenditures = Maintenance, electricity and water cost.


Analysis of household income32 gives an indication of household savings and funds available for

investment in housing purchase, improvement, or extension as a starting point for the affordability

analysis. As can be seen in Table 5, household savings (income less expenditures) increases quite

dramatically as one moves from lower to higher income deciles. Analysis of various subsets shows

that there is a lot of variation in the median monthly household expenditure in different geographic

regions.

Table 5. Monthly Household Income, Expenditure and Funds Available for Housing

HH Decile Monthly HH Income

(IDR mm)

Monthly HH Expenditures

(IDR mm)

Percentage HH Savings

(IDR mm)

Funds for Housing Investment(IDR mm)

Decile 1 1.2 1.2 7% 0.2

Decile 2 1.8 1.4 21% 0.5

Decile 3 2.1 1.6 24% 0.6

Decile 4 2.6 1.8 30% 1.0

Decile 5 3.1 2.1 34% 1.2

Decile 6 3.6 2.3 34% 1.5

Decile 7 4.2 2.7 36% 1.8

Decile 8 5.2 3.2 39% 2.4

Decile 9 7.0 4.3 39% 3.2

Decile 10 13.9 8.2 41% 6.6

Average 4.5 2.9 30% 1.9


Housing Affordability under Existing Conditions

Under existing conditions, formal housing fi nance is likely to be diffi cult to access for the bottom

80% population. Only the high-income segment (Deciles 9-10) are able to obtain market rate

mortgage fi nance (variable interest rate of 11-14%, 15 year tenure and 20% minimum down

payment), enabling them to purchase a market rate unit of above IDR 270 million. Low-income

households (Decile 1-4) will likely rely on fi nancing from microfi nance institutions, at high rates

(e.g 30-40% per annum) and short tenure (e.g. 3-5 years), resulting in a struggle to fi nance even

a basic solution of IDR 20 million. Meanwhile, apart from the heavily subsidized FLPP mortgage,

there are no interim housing fi nance products to service the middle-income segment, particularly

those with informal incomes. Using the subsidized FLPP loan (of fi xed interest rate of 7.25% per

annum, 20 year tenor and down-payment of 10%), middle-income households with a formal

income can comfortably afford a unit of above IDR 100 million, yet around 55% of the total loan is

supported by an implicit subsidy, resulting in a high economic cost to the government (see Annex

4.6).

32 Household income formula for Decile 5 has been calculated from the Median of Greater of Minimum Wage and Minimum Decent Living (Ministry of Labor) for 24 provinces multiplied by the Number of Working Adults. Household income for other deciles has been extrapolated from the median point, Decile 5, using the household expenditure curve provided by BPS Susenas data.

69 | Annexes

Tab

le 6

. A

ssum

ptio

ns f

or

Ho

usin

g F

inan

ce P

rod

ucts

Ava

ilab

le

MF

I Lo

anS

ubsi

diz

ed F

LPP

Lo

anC

om

mer

cial

Lo

an

Decile

s1-4

5-8

8-1

0

Loan T

erm

(Years

)2

20

15

Rate

20%

7.2

5%

12%

Dow

n P

aym

ent

20%

10%

20%

Tab

le 7

. A

ffo

rdab

ility

Ana

lysi

s b

y D

ecile

with

Ass

umed

Ho

usin

g F

inan

ce P

rod

ucts

HH

Dec

ile1

23

45

67

89

10

HH

Inco

me

1,24

8,84

1 1,

793,

549

2,09

6,88

2 2,

621,

352

3,11

6,21

5 3,

576,

109

4,15

4,03

1 5,

234,

344

7,00

6,83

9 13

,882

,924

HH

Exp

endi

ture

s1,

166,

502

1,41

8,48

6 1,

590,

485

1,83

2,59

7 2,

064,

460

2,34

9,39

5 2,

664,

861

3,20

5,57

4 4,

258,

883

8,20

1,53

4

Hou

sing

Cos

t (Im

pute

d)10

1,33

9 10

1,78

0 12

4,02

0 16

3,54

5 19

6,68

9 24

0,64

1 27

8,10

2 34

9,74

4 47

5,60

4 93

4,33

8

HH

Spe

nds

less

Hsg

Cos

t1,

065,

163

1,31

6,70

6 1,

466,

465

1,66

9,05

2 1,

867,

771

2,10

8,75

3 2,

386,

759

2,85

5,82

9 3,

783,

279

7,26

7,19

6

Ava

ilab

le f

or

Ho

usin

g18

3,67

7 47

6,84

3 63

0,41

7 95

2,29

9 1,

248,

444

1,46

7,35

5 1,

767,

272

2,37

8,51

5 3,

223,

560

6,61

5,72

8

Ava

ilab

le f

or

Ho

usin

g (%

)15

%27

%30

%36

%40

%41

%43

%45

%46

%48

%

DTI

%10

%20

%25

%28

%30

%30

%33

%35

%37

%40

%

Max

EM

I12

4,88

4 35

8,71

0 52

4,22

1 73

3,97

8 93

4,86

5 1,

072,

833

1,37

0,83

0 1,

832,

021

2,59

2,53

0 5,

553,

170

MF

I Lo

an

FLP

P L

oan

C

om

mer

cial

Lo

an

Max

Loa

n2,

453,

720

7,04

7,92

4 10

,299

,878

14

,421

,198

11

8,28

0,98

9 13

5,73

6,99

1 11

4,21

9,84

4 15

2,64

7,00

0 21

6,01

3,94

0 46

2,69

9,32

7

Max

Hom

e P

rice

3,06

7,15

0 8,

809,

905

12,8

74,8

47

18,0

26,4

98

131,

423,

321

150,

818,

879

142,

774,

805

190,

808,

750

270,

017,

426

578,

374,

159


Figure 5. Estimated Level of Affordability of Units for Main Household Segments

Home Price Households Can Afford

Median Monthly HH Income

Decile 9-10 IDR > 270 MMIDR

10.2 MM

Deciles 5-8 IDR 4.0 MM

Deciles 1-4 IDR 1.9 MM

IDR +/-145 MM

IDR <20 MM

Housing Affordability. For Deciles 5-8, while the Median Home Price to Household Income

ratios are within acceptable range from a theoretical framework (home price is 3.9 times annual

income), in Home Price Households Can Afford, it is diffi cult to fi nd supply of housing for less than

IDR 145 million, particularly in large cities. If we were to apply the median FLPP ceiling price for

vertical units as set by the MPWH at around IDR 300 million, then the ratio of Median Home Price

to Median Household Income ratio reaches 6.5 times. This refl ects an affordability stretch for this

segment which is expected to grow worse over time.

Table 8. Median Home Price to Income Calculation, using National Averages

Home Price / Income Calculation D1-4 D 5-8 D9-10

Median HH income 1,945,215 3,865,070 10,444,881

Median HH Expenditures 1,391,585 2,247,756 5,525,238

Funds Available for Housing 553,630 1,617,313 4,919,644

Debt To Income 25% 33% 40%

Rate / Term Assumptions 40% / 3 yrs 7.25% / 20 yrs 12% / 15 yrs

Max Mortgage Installment 486,304 1,275,473 4,177,953

Max Loan Amount 10,108,134 161,375,470 348,113,956

Max Home Price 12,635,168 179,306,078 435,142,445

“Theoretical” Median Home Price/Income Ratio 0.5 3.9 3.5

Market Vertical Unit In Metros N/A 300,000,000 1,000,000,000

“Market” Median Home Price/Income Ratio N/A 6.5 8.0

71 | Annexes

Moving Toward Effective and Effi cient Public Policy

Improving the accessibility and affordability of housing fi nance products will expand the reach and

reduce the cost to the government of making housing affordable to all income segments.

In this scenario, commercial mortgage rates are maintained for higher decile households. Deciles

4-8 are still supported by public subsidy. However, this subsidy is no longer a subsidized interest

rate channeled through fi nancial institutions, which has a high cost to government. Instead it

becomes a demand-side subsidy, which can be adjusted progressively to household incomes,

and costs only a fraction of the FLPP subsidy per household (half to less than a quarter), to reach

the same levels of affordability for Decile 4-8 households33. This down-payment assistance could

be provided as an upfront subsidy or a more effi cient buy-down subsidy and may need to be

adjusted to enable affordability in different geographic areas.

Support to develop the housing microfi nance sector and reduce the costs and lengthen the terms

of microfi nance loans for housing purposes (e.g. 5 year tenor, 20% per annum) will make it easier

for lower-income deciles to access fi nance. This can be used for incremental home improvement

or co-fi nancing of basic core units that are estimated to cost around 25 million.

Table 9. Estimates of Home Affordability with Effective Public Policy

Decile Example Housing

Solution

Approx. Subsidy Approx.

Affordable Loan

Max. Home Price (w. Savings

& Subsidy Support)

1

Core Unit or Home

Improvement +

HMF Loan

e.g. 15 million

for home

improvement

4.7 million 20.9 million

2 13.5 million 31.9 million



5

Down-Payment

Subsidy and Long-

Term Finance

Progressive

demand-side

subsidy, linked to

income

78.9 million 97.4 million

6 89.4 million 112 million

7 114 million 143 million


9Commercial Loan No subsidy.

216 million 463 million


Targeting and Budgets

The following scenarios provides some rough estimates of the total annual budget allocation and

balance between programs required to reach housing delivery targets, based on three scenarios

– achieving full access to affordable housing by 2019, 2024 and 2029, respectively.

The simulation has focused on the maximum housing needs, using an estimated defi cit of 13.5

million units and annual new demand of 920,000 units. New housing demand is spread evenly

across deciles, whereas the housing defi cit is concentrated in lower-income deciles (60% of

backlog in D1-D4, 33% of backlog in D5-D8, and 7% in D9-D10).

33 In the FLPP, the implicit subsidy is around 55% of the loan’s value. This compares to a demand-side subsidy,that requires an upfront subsidy of 25% for the same level of affordability, and 11% of the loan amount for a buy-down subsidy.


Policy solutions have been approximated as follows:

Slum households are addressed 80% by slum upgrading, while 20% may need to be resettled

into public rental units.

Additional housing defi cit in D1-D4 is reached by home improvement subsidies, and new

demand is addressed 80% by core or row house units, and 20% by public rental units.

All housing backlog and defi cit in D5-D8 is addressed by mortgage assistance and market-

making measures.

The costs of these policy solutions are also roughly estimated to simplify calculations, with an

estimated 25% of overall budget being used for management and administration of programs.

Current budget allocation, accounting for the Ministry of Housing 2014 program budget, the

budget allocation to FLPP and slum-related activities of the Ministry of Public Works is estimated

to be in the order of IDR 10 trillion.

The following scenarios are carried out (details shown in Table 10):

Scenario 1: Reduce defi cits and meet new housing demand by 2019. Requires an

estimated 6.5x current housing-related budget or approximately 3.5% of total GoI annual

budget.



budget.



budget.

Scenario 4: Maintaining current budget allocation. Maintaining estimated current housing-

related budget or approximately 0.5% total GoI annual budget.

73 | Annexes

Table 10. Estimated Budget Required to Reach Policy Targets

Scenario 1: Reaching Targets by 2019


Program Type

Target Decile

Estimated Cost of Subsidy (IDR m)

No. of Units

Budget Reqd

(IDR Tr)

Share of

Units

Share of

Budget

No. of Units

Budget Reqd

(IDR Tr)

Share of

Units

Share of

Budget

Slum Upgrading

D1-D4 15 624,000 9.4 19% 14% 312,000 4.7 16% 12%

Home Improvement

D1-D4 15 831,900 12.5 26% 19% 415,950 6.2 21% 16%

Core Units D1-D4 25 294,400 4.4 9% 7% 294,400 4.4 15% 11%

Public Rental Housing

D1-D4 50 229,600 3.4 7% 5% 151,600 2.3 8% 6%

Down-Payment Assistance

D5-D8 20 1,253,600 18.8 39% 29% 810,800 12.2 41% 31%

Management & Admin

All 25% - 16.2 - 25% - 9.9 - 25%

Totals 3,233,500 65 1,984,750 40

No. of Times Approx. Current Budget

6.5 4.0

% of Total Budget for 2014 3.5% 2.2%


Scenario 4: Maintaining Current Budget Allocation

Program Type

Target Decile

Estimated Cost of Subsidy (IDR m)

No. of Units

Budget Reqd

(IDR Tr)

Share of

Units

Share of

Budget

No. of Units

Budget Reqd

(IDR Tr)

Share of

Units

Share of

Budget

Slum Upgrading

D1-D4 15 208,000 3.1 13% 10% 96,490 1.4 24% 12%

Home Improvement

D1-D4 15 277,300 4.2 18% 13% 128,638 1.9 31% 16%

Core Units D1-D4 25 294,400 4.4 19% 14% 27,314 0.7 7% 11%

Public Rental Housing

D1-D4 50 125,600 1.9 8% 6% 10,651 0.5 3% 6%

Down-Payment Assistance

D5-D8 20 663,200 9.9 42% 32% 145,384 2.9 36% 31%

Management & Admin

All 25% - 7.8 - 25% - 2.5 - 25%

Totals 1,568,500 31 408,477 10

No. of Times Approx. Current Budget

3.1 1.0

% of Total Budget for 2014 1.7% 0.5%


3. Background to Housing and Settlements Policy

History of Housing and Settlements Policy in Indonesia34

Before Independence

Urban Indonesia, during the Dutch colonial period, was divided into two types of settlements: the

offi cial city built along a main road, mainly for civil servants, under the jurisdiction of a Mayor and

informal settlements (kampung) located beyond the offi cial city under the jurisdiction of the Regent

(Bupati). Although the dual city system was offi cially rescinded after independence, its legacy can

still be seen today. The emergence of informal settlements was not a signifi cant challenge at that

time due to the availability of vacant land.

1950-1997: Independence and the “New Order”

Efforts to ensure decent housing began in 1950 with the Congress of Healthy People’s Housing

and the establishment of a Housing Research Institute (LPMB/Lembaga Penyelidikan Masalah

Bangunan), a Finance Institute (YKP/Yayasan Kas Pembangunan) and enactment of housing laws

and regulations to provide a legal basis for the provision of low-cost housing for state employees.

In the late 1950s, the infl ux of rural immigrants led to more informal settlements in the cities.

A Long Term Development Plan or Twenty-Five Year Plan was introduced in 1969, sub-divided

into a series of Five Year Development Plans known as Repelita. The three development objectives

(Trilogi Pembangunan) were political stability, economic growth and social equity.

The fi rst Five Year Plan or Repelita I (1969-1974) focused on political and economic stabilization

after the turbulence of the mid 1960s. Housing was viewed as an instrument for stability and

was included in the Plan. A pilot housing project known as P1000 was implemented in Jakarta,

Karawang, Bandung, Semarang, Yogyakarta, Surabaya and Jember. Building Information Centers

or BICs were established. The Kampung Improvement Project or KIP, the world’s fi rst slum

improvement project, was launched in Jakarta and Surabaya. A National Workshop on Housing

and Human Settlement in 1972 recommended a mass housing program, a reinvigorated Housing

Research Institute, a National Housing Policy Board consisting of 10 Ministries, known as BKPN,

a National Urban Development Corporation, that became Perumnas, and a National Saving Bank,

known as BTN, to provide housing fi nance. The architecture of Indonesia’s housing sector policy

was now in place.

The second Five Year Plan or Repelita II (1974-1979) emphasized economic growth. Housing was

viewed as an engine of economic growth. Private developers and Perumnas invested in the formal

housing sector. However, home-owner driven housing construction in low-income settlements

did not receive suffi cient resources or emphasis and the challenge of informality was also not

addressed. A dual housing sector emerged i.e. formal property development in parallel to home-

owner incrementally-built housing.

34 This section is based on the Draft Summary Report for SAPOLA, October 2014.

75 | Annexes

The third Five Year Plan or Repelita III (1979-1984) emphasized social equity. Housing was viewed

as a basic need and social good. It was therefore provided at a subsidized rate to the poor. The

government acted as service provider, while KIP was scaled up to cover 200 cities. A pilot to

integrate KIP with broader urban development goals was undertaken such that basic services

provided by KIP (water, drainage, solid waste management, health posts etc.) were now linked

to the urban network. Supported by booming petroleum revenue, the Indonesian government

implemented a massive top down housing and infrastructure development program. The formal

housing sector was well-supported by a wide range of supply side instruments.

The fourth Five Year Plan or Repelita IV (1984-1989) retained this emphasis. After a successful pilot, the

integrated urban development approach was scaled up as the Integrated Urban Infrastructure Development Program or IUIDP in several cities, retaining KIP as one component. In the mid

1980s, IUIDP was offi cially launched by the Ministry of Public Works in 400 cities alongside KIP

and the Market Infrastructure Improvement Program or MIIP in 100 cities. However, the

upgrading or improvement of informal/illegal settlements was not included and largely addressed

through eviction and the construction of low-rise apartments.

Repelita V (1989-1994) continued the emphasis on social equity. IUIDP was implemented in more

provinces and cities. Slum upgrading not only covered infrastructure but included urban renewal

on state land. The emphasis on low-rise apartments remained. Law No. 4/1992 on Housing and Settlement now recognized the role of the community in housing development. However,

the top-down and supply-driven approach continued to receive more attention than incipient

community-based initiatives.

The Second Long Term Development Plan (PJP II) commenced in 1994 from Repelita VI

(1994-1999). But the sixth Repelita was not completed due to the fall of the New Order Regime

in 1998. Mainstream housing development continued, yet much of the subsidized provision of

housing for low-income groups was captured by the not so poor.

Reform Era (1998 – to date)

The Reform era began with the democratic transition in 1998, which was triggered by the East

Asian Financial Crisis and ensuing political unrest. The immediate policy emphasis was to reduce

the sharp increase in poverty levels. Two poverty programs were initiated i.e. the Rural Poverty

Program and the Urban Poverty Program with World Bank support. There was no immediate

attention to housing policy until October 1999 when the legislature issued GBHN or the General

Guideline for National Development. The Government of Indonesia operationalized this and had

the legislature approve Propenas 2000-2004 or the National Development Program.

The need to address slums was recognized because of increased urban poverty caused by the

East Asian Financial crisis of 1997. The Reform Era also triggered an administrative decentralization

to elected regional governments in 1999. Housing became the responsibility of local governments.

The World Bank worked with GoI to evaluate the housing market in Indonesia and develop

recommendations. This assistance was known as HOMI, or the Housing Market Indonesia program, which reiterated that a well-functioning housing market still excludes under-served

segments of the urban poor. This category needs outright housing assistance.

The HOMI recommendations were adopted by the Ministry of Human Settlements and Regional

Infrastructure and incorporated under Ministerial Decree No 217 of 2002 i.e. KSNPP or the National


Policy and Strategy for Housing and Human Settlements. However, the central government

failed to transfer resources to local governments for its implementation, and local governments

were not ready to assume additional responsibilities, given funding and capacity constraints. In the

case of the Rusunawa, which was the Program for Public Rental Apartments, the municipal role

was limited to identifying the location and available land. The design, procurement of contractors,

actual construction and civil works supervision continued to be a central line ministry responsibility.

The local governments did not own the program, did not see it as a priority and were reluctant to

allocate municipal land for what was viewed as a central government program.

In the case of the Perumahan Swadaya or the Self-Help Housing Program, the central

government provided funds to eligible households to repair their homes. The central government

has struggled to identify data on who was eligible to receive fi nancial assistance. The central line

agency insisted on undertaking the survey and preparing the budget. The lack of preparation,

capacity-strengthening, transfer of resources, and coordination between central agencies and

local governments after decentralization has resulted in limitations to the implementation of

housing programs.

With the success of engaging communities directly in urban poverty alleviation activities, the

national PNPM Urban program initiated a community driven neighborhood (infrastructure)

development program, through block grants provided to communities. The trend was to integrate

community driven slum improvement efforts with poverty reduction.

The Government of Indonesia reiterated its commitment, however, to the right to adequate housing

in the Long-Term Development Plan 2005–2025 (RPJPN), the Medium-Term Development

Plans: RPJMN (2004-2009) and the RPJMN (2010–2014). Law No 1 of 2011 on Housing and Settlement Area was enacted to replace the previous Housing Law No 4 of 1992.

Laws and Regulations Related to Housing and Settlements

The following laws and regulations form the legal basis for policy formulation:

a. The Amendment to the 1945 Constitution of the Republic of Indonesia, where Article 28H Clause (1) states that everyone has the right to a prosperous life, a settlement and a

healthy environment.

b. Law No. 39/1999 on Human Rights, Article 40. The right to shelter and a decent living as

an advancement of human rights.

c. Law No. 1/2011 on Housing and Settlement Area. The State is held accountable to

ensure decent and affordable housing and settlements for Indoneisan people

d. Millennium Development Goals (MDGs). Providing decent and affordable housing is a

global commitment as stated in the Habitat Agenda and the MDGs.

There are some strengths and short-comings to this legal structure. Unlike the previous Housing

Law, Law No 1/2011 on Housing and Settlement Areas incorporates operational guidance35 on

35 Detailed arrangements include: i) the division of roles and responsibility among different levels of government, ii) detail steps in planning, construction, implementation and controling of housing development and settlement area development, iii) approach on slum prevention and slum improvement, iv) land provision, v) fi nancing system, vi) incentive and disincentive.

77 | Annexes

housing, settlement development, slum alleviation and provision of land for housing. However,

there is a lack of enabling regulations to support implementation. The four mandated government

regulations36 have not been issued. Further, Law 1/2011 fails to address the role of the community

or to adequately defi ne a slum.

Conclusion

Housing policy moved from social housing to the construction of housing units below the market

price for low-income people, who have been largely public sector employees (e.g. in the case of

Yayasan Kas Pembangunan). There was a massive production of low-cost housing by the private

and public sector that failed to address the needs of the urban poor.

Area development schemes, like the KIP, linked basic services within the settlement or kampung

to broader urban development. However, individual housing development and area development

have remained supply-driven.

Some pilots emphasizing a demand-side approach were launched. This included the Community

Based Housing Development or CBHD, CoBuild, and NUSSP. These were peripheral to the

national housing police and, as a result, the poor have suffered from the high and infl ating price

of housing and land.

As of today, most local governments do not drive low-income urban housing programs. The

municipal budget apportioned for low-income housing is limited. There is a lack of systematic data

related to slums and informal settlements. The National Housing Board has ceased to function.

The community-driven programs of housing improvement were pushed through by the central

government and not by the municipalities concerned. In 2013, an Inter-Ministerial Working Group

on Housing and Settlements chaired by Bappenas was established to review performance.

Indonesia continues to have a substantial housing defi cit. Subsidized loans and a provision of

infrastructure and tax exemptions were introduced for low-cost housing, yet these steps meet

just 20% of the housing needs and have not addressed the underlying reasons for the defi cit.

Most households still meet their requirements through incremental owner-driven construction that

remains in the informal sector. The needs of the poorest, who often live in illegal and squatter

settlements, have not yet been addressed through policy.

36 Government Regulations are now in the formulation process which are: i) Supervision of Housing and Settlement Areas, ii) The Development of Housing and Settlement Area, iii) Housing Finance Mobilisation and iv) State Housing,


4. Sector-Specifi c Context

Annex 4.1 Housing Sector Governance

Summary of Sector Findings

There are four long-standing structural issues that have limited the effectiveness of housing sector

governance in Indonesia:

1. Central government implements most housing policy and programs with a limited role for local government. Many local governments have been unable to take on an effective

role in supporting housing provision because of a lack of adequate funding, political interest

or technical capacity. It will be diffi cult for central government to meet Indonesia’s housing

needs alone. Increasing the participation of local governments is important because of the

scale and diversity of the country’s housing challenges. Indonesia has over 500 subnational

governments, each of whom have a unique, geographically-specifi c set of housing and

settlement challenges. National programs could be redesigned with more fl exibility and a

clearer transfer of responsibilities and support to local governments. This approach would help

programs reach scale while maintaining quality and responsiveness.

2. There are limited coordination mechanisms across central government agencies. Good

housing policy requires the commitment and coordination of a wide number of stakeholders

across central government ministries. No clear framework for the coordination and integration of

housing policy between government agencies exists, resulting in both overlap and disconnect.

Key central level ministries and agencies with a role in housing policy and programs include

Bappenas, MPWH, Ministry of Finance, Ministry of Home Affairs, Ministry of Agrarian Affairs

and Spatial Planning, the Coordinating Ministries for People’s Welfare and Economic Affairs,

Ministry of Social Affairs, Ministry of Fisheries, BPN, among others. The Inter-Ministerial Working

Group for Housing and Settlements (Pokja PKP) is emerging as an important institution that

creates space for discussion and decision-making on policy development across government

agencies. However, its mandate and responsibilities will need to be elevated if the Pokja is to

establish coordination and integration mechanisms.

3. There is a lack of well-structured support to local governments and private sector developers

to increase their participation and contribution to national housing targets. While local

governments have the mandate to provide housing and services for low-income residents,

many need support for building capacity for policy and regulation development, program design

and implementation, as well as monitoring and information systems, and other aspects. There

are also limited incentives for private real estate developers to increase their participation in

the supply of housing for low-income households. Government can focus on fostering private

sector interest by lowering their costs. This would help channel private investment towards the

delivery of affordable housing.

4. Key building blocks for improving housing sector governance are lacking. These include

(a) establishment of a common and clear policy direction in the housing sector, (b) classifi cation

of market segments and approach to determining affordability and targeting of programs, (c)

79 | Annexes

development of housing management information systems for monitoring the housing market,

informing policy, and evaluating the performance of specifi c programs, (e) effective means

of enforcement of regulations, (f) improved technical capacity of government agencies to

implement policies.

Central Government Context

Central government has a range of actors with various priorities and functions in the housing

sector. In principle, central government (and to a lesser extent provincial government) has the

following responsibilities: (a) formulating housing regulations, policies, and programs; (b) allocating

and managing central government budget to ensure optimal affordable housing delivery; (c)

facilitating housing supply for low income communities; (d) facilitating research and development

and technologies for effective affordable housing construction; (e) providing certifi cation,

qualifi cation and classifi cation of organizations and/or individuals in housing and real estate; (f)

providing training and support to local governments. However, government performance in most

of these activities can be improved.

With regard to designing and implementing national housing policy, Bappenas and Ministry of

Finance prepare long-term development plans and the national budget and must balance and

align the priorities in the housing sector with other national development objectives. MPWH is the

main executing agent of housing and settlements policy, taking a lead in preparing and executing

housing programs. However, there are many overlapping areas in which other Ministries roll out

their own housing programs, for example, the parallel rental housing programs that were previously

executed by Ministry of Public Works and Ministry of Housing. Coordination of government entities

is essential for implementing housing policy effectively and using public funds effi ciently.

In terms of collecting and sharing market information, Bank Indonesia currently reports data from

the mortgage markets with a Credit Bureau and Home Price Index, while the BPS national socio-

economic surveys provide consumer profi le information. However, much more can be done to

facilitate the availability and sharing of up-to-date and accurate housing sector information.

Government also plays an important role in enabling the private sector. The ability and cost for real

estate developers to develop housing depends heavily on how government actors perform in their

respective responsibilities. For example, BPN is responsible for national land regulation, registration,

certifi cation, management and consolidation, while LG is responsible for spatial planning, zoning,

and issuing all land-use and development permits within their legislative boundaries. Streamlining

and improving the transparency of these processes can reduce costs for the private sector and

enable the market to more easily produce low-cost housing.

Local Government Context

Government Regulation No. 38 of 2007 and Law No. 1 of 2011 laid out the roles and division of

responsibilities of central government, provincial government, and local government with regards

to the provision of affordable housing. These regulations make local government responsible

for responding to local housing needs. However, the mechanisms that would enable local

governments to fulfi ll those responsibilities are not in place. Few local governments have dedicated

housing agencies. Jakarta and Medan do but they are the exception rather than the norm. Local

governments often do not appear to prioritize low income housing, resulting in inadequate budget

allocated for supporting affordable housing provision.


As per Regulation 38, 2007, local government is specifi cally mandated to provide housing to citizens

residing in its territories and to dedicate specifi c areas in the municipality for affordable housing

development. Law No. 32/2004 further underlines these decentralization and deconcentration

principles. It devolves and delegates authority from central government to local government

(Articles 1.7 and 1.8), and gives local governments the right, authority, and duty to regulate their

own affairs autonomously in the interest of local communities. It also holds them responsible for

improving public welfare and services (Articles 1.5 and 2.3).

The law articulates that the fi scal balance between central and local government must be fair,

proportionate, democratic, transparent, and accountable, taking into account the context,

potential, and funding requirements for the implementation of decentralization (Article 1.13). Within

the housing sector, funds are usually directly channeled from central government to projects with

limited use of local government funds.

Real Estate Development Context

Perumnas is a State Owned Enterprise (SOE), established in 1974 to act as Indonesia’s offi cial

public housing developer for the realization of government policies and programs, as stipulated

by Regulation 29/1974. From 1974 until the 1997 crisis, Perumnas received substantial support

from the government to implement its programs. Such support included: (a) fi nancial assistance

for land purchase, (b) permanent no-cost equity, and (c) hard assets, such as land. At the peak of

its operations (1992-1998), Perumnas’ construction contributed up to 50% of national affordable

housing development. Since 1997, withdrawal of preferential treatment and a new mandate to

improve on annual returns (required as an SOE) resulted in Perumnas shifting its business strategy

and model towards more profi table market segments and products.

Today, Perumnas operates more like a commercial developer, with no ongoing government subsidy

and no legal commitment to low-income housing delivery. Perumnas’ key resources –capabilities

in structuring real estate transactions, land development, housing development, urban renewal,

and property management, as well as 1000 hectares of developable land– could be better utilized

to support implementation of the national housing policy.

Two associations of private real estate developers exist, APERSI (the Association of Low-Cost

Housing Developers) and REI (Real Estate Indonesia). The majority of formal housing is delivered

by these developers, together with a minority share by Perumnas.

APERSI. APERSI consists of 2,500 members, most of whom focus on the development of

affordable landed homes that qualify for FLPP. APERSI members account for approximately 60%

of the total landed houses that are produced each year in Indonesia. The typical profi t margin

for landed housing is approximately 10%, depending on the land price. The ease of sales and

government support in providing trunk infrastructure makes FLPP landed homes an attractive

market option.

APERSI’s geographical breadth, number of members, and members’ active participation in

affordable housing production make it a valuable asset that could be utilized in stimulating the

supply of affordable housing.

REI. Established 42 years ago, Real Estate Indonesia (REI) has 2,800 member developers that are

spread across 34 local chapters in 33 provinces. 70% of its members engage in the development

81 | Annexes

of affordable housing. In 2013, of the 250,000 general housing units produced by REI members,

120,000 units were affordable, which REI defi nes as units below the sales price of IDR 200 million.

Given that both APERSI and REI have sizeable and active memberships that participate in the

development of market-rate and affordable housing, these organizations could serve as an

important resource for government in the gathering of information to understand market trends

and needs and to increase private developer participation in housing policy formulation and

execution.

Key Delivery Blockages. The key challenges limiting private sector participation and the supply

of affordable housing in Indonesia include:

Land. Private developers of affordable housing have diffi culty accessing land at the right

price, condition, and location.

Taxation. In some cities, the land tax has increased well ahead of infl ation norms, and

many taxes create incentives for evasion, including the transfer tax and VAT. Both taxes

increase the end cost of units to both developers and consumers, thereby encouraging

under-reporting of the sale price.

Finance. Access to affordable construction fi nance remains a challenge to developers,

particularly small ones. Most developers rely on their own equity for construction. Larger

developers may borrow from commercial banks or issue bonds at rates around 13% per

annum for a 12 to 24 month period.

Permitting and zoning. Currently, there are wide disparities between local governments with

regards to the time and costs of permitting. This creates a lot of uncertainty. Construction

cannot begin until permits are issued. These delays in permitting may raise the costs of

development by as much as 20% in a 12 month period, due to the high cost of capital.

Infrastructure. Some local governments provide support to developers of FLPP-qualifi ed

landed housing in terms of trunk and site infrastructure, yet this support is not consistent and

there is not usually infrastructure support for vertical developments of FLPP projects.

Policy does not take into account to market diffi culties. The Ministry has announced that

from March 2015, FLPP loans will only be available for vertical units. While Perumnas and some

APERSI and REI developers have the technical capacity to develop vertical housing projects,

developers are often deterred from building vertical projects due to technical challenges,

diffi culties in accessing longer-term development fi nance, and lack of governmental support

in areas such as infrastructure provision, tax breaks, and permitting.

Funding of Housing Programs

Funding of central-level programs. The majority of housing programs are structured, regulated,

and implemented by central government. MoF originates all funding for MPWH housing programs

through the APBN. The funding fl ows to two key buckets of programs: (i) the Deconcentration

Grant that funds the provision of technical assistance to LGs, and (ii) project-specifi c funding

via the Rusunawa (public rental housing) and BSPS (self-help housing) programs. Through this

process, funds fl ow directly from central government to projects and are never transferred to local

governments. In such cases, the ministry-level agency undertakes the procurement and project

execution. In parallel, the Ministry also administers and channels MoF-disbursed investment

funds through a BLU (public service agency) to banks who deliver the FLPP subsidized mortgage

program.


Figure 6. Flow of Funding for MPWH Programs

MoF

APBN (MoH program budget)

Provincial Government (oversight)

TA funding for LG

Direct Project Funding

Local Government (needs identifi cation)

Private sector 20%

contribution to affordablehousing

• Deconcentration Grant: for LG Capacity Building

• Project Fundings: BPS, Rusunawa

MoH

Funding of local-level housing budget: A small number of housing programs are shaped by

local governments and funded directly out of local budgets. Such local government housing

budgets consist of three main sources of funding: (a) local government revenue from taxes, charity

contributions, and Public Service Obligation (PSO) contributions from both local government and

central government general budget for housing rebated costs; (b) DAU, i.e., general purpose

grants received by every local government; and (c) DAK, i.e., special-purpose grants allocated for

a specifi c use, which may include housing-related infrastructure or services. This local housing

budget typically makes up approximately 3% of local government’s total budget, however there

is signifi cant variation across them: active and well-resourced cities (such as DKI Jakarta) are

estimated to allocate between 5% and 10%, while less-resourced local governments spend

between 1% and 3% on housing.37

As there is no mechanism to transfer capital grants from central ministries to local governments, it

can be diffi cult for cities to tailor and direct their own programs to fi t local needs and build capacity

through experience. Also, it is challenging for ministries to carry out monitoring and oversight at

the local-level.

37 Source: Deputy for Area Planning, Ministry of Housing

83 | Annexes

Figure 7. Sources of Local Housing Program Funding

Tax

revenue

Charity

Contributions

DAK

Special Funding

DAU

Basic Funding

Local Government Housing Budget

(for direct spending by LG)

Housing programs/projects

created and executed by LG

<< 5%Contribution to LG

housing budget

70-85%Contribution to LG

housing budget

15-30%Contribution to LG

housing budget

Local government

revenue

PSO

MoF

Housing Sector Governance Systems

Many of the basic building blocks of housing policy are missing. These include a lack of formal

defi nition of housing defi cit fi gures, affordability and targeting measures, as well as minimum

housing standards and regular reporting and management information systems that allow the

government to monitor activities in the housing sector and better inform housing policy.

There is also a lack of clear reporting and accountability mechanisms to monitor the performance

of specifi c programs so that they can be adjusted and improved over time. Informed budget

decision-making would benefi t from an economic evaluation of all types of government support,

including implicit subsidies and fi scal subsidies. This approach would be done in parallel

with traditional budget accounting, and be used to assess the cost/benefi t balance of public

interventions. A new evaluation system would include: (i) more precise information on the profi le of

the benefi ciaries of public assistance; (ii) all “hidden” cost assumed by the government aside from

budgeted expenditure, for example, the implicit subsidy embedded in the guarantee schemes.


Sector Recommendations

1. Develop a System for Local Government Accreditation

The Roadmap recommends MPWH to develop a local government accreditation program for the

implementation of housing and settlements programs. Under this program, central government

would assess local governments and rank them into different tiers, based on technical criteria that

cover institutional and fi scal capacity, local housing needs and performance. The accreditation

program would focus primarily on city governments, where housing backlog and new demand is

highest.

This accreditation system may be used over time to qualify local governments for capacity-building

activities, increase autonomy and responsibility in program implementation, determine the funding

balance (between central and local budgets), and inform the design of national programs. There

will need to be a unit, likely best positioned within MPWH, responsible for preparing and publishing

the accreditation on a regular basis.

Figure 8. Example Structure of Local Government Accreditation System

ACCREDITATION LEVELS:

ACCREDITATION STANDARS:

Funding Autonomy Peer-to Peer Learning

TIER 1 High High Live case contributor

Observer and learner

Observer and learner

TIER 2 Medium Medium

TIER 3 Basic Basic

Resources,Capacity,Readiness

Large Cities Medium Cities Small Cities/Rural

PerformanceTrack Record

Accessible LocalSupport MPWH Project Facilitation

Support and TA

As part of this accreditation system, central government may require that local governments report

their performance and progress on program delivery on a regular basis, as well as to implement

local-level reforms or training activities, and apply Standard Operating Procedures (SOPs) in

coordination with program delivery. Over time, high-performing local governments with successful

housing programs may be able to share their experience with less-developed local governments

through peer-to-peer learning platforms.

As the accreditation process matures, central government funding for housing and settlements

programs can be distributed on a competitive basis to provide additional incentives for improving

performance and targets.

85 | Annexes

2. Build Capacity of Local Governments

The development of a Technical Assistance Facility will provide a means for central government

to channel support directly to local governments to plan, prepare and execute housing and

settlements initiatives. A major component of the accreditation program is capacity-building of

local governments. The Technical Assistance Facility can be housed within MPWH or set up as a

subsidiary, which then creates Standard Operating Procedures, guidelines, training materials and

templates for local governments, disseminates information and offers capacity-building services.

The TAF will also maintain on-demand support or advisory services for activities such as project

preparation and implementation of local reforms – acting as a safety net where local governments

are taking on greater responsibilities in planning, fi nancing and executing activities.

Participation in the capacity building program would be entirely voluntary. Local governments

can decide on their participation based on need and desire to perform. Low-capacity local

governments could be made eligible for additional grant funding for the capacity building and

high-capacity local governments may need to pay a fee for these services.

Capacity building activities will meet local government needs in carrying out programs in

incremental housing, slum upgrading and public housing. They may also include enhancing

awareness of local governments regarding national programs, development of plans and

strategies (including spatial plans), local programming and budgeting for housing and settlements,

project preparation, community consultations, social and environmental safeguards, structuring

of fi nance implementation, project audits and impact assessments, and monitoring and oversight

of the market. Long-term, where appropriate, the capacity building program could also provide a

pathway for local governments to develop a local housing agency (SKPD Perumahan) or Housing

Resource Center.

The proposed capacity building program could also act as the curator and facilitator of peer-to-

peer learning and sharing of experiences in implementing housing and settlement initiatives.

3. Design Programs and Allocate Funding with Performance-Based Rewards

The Roadmap recommends the design of housing program delivery systems and funding

allocation to be linked to the accreditation and capacity-building of local governments. Under

such an approach, higher-capacity local governments will be able to access more capital grant

subsidies for projects, and will have greater fl exibility, autonomy and local accountability in

executing housing programs. At the same time, low capacity local governments will be supported

through project funding to build their capacity and performance incrementally, and rewarded for

such buildup by being provided with greater autonomy and resources.

Criteria and conditions of central government funding allocation for programs can be determined

based on two key factors: housing needs at the local government level (as collected and reported

by the HREIC) and local government capacity (as monitored by the accreditation program).

The Roadmap recommends designing program delivery systems and funding allocation that are

predicated on the accreditation and capacity-building of LGs. Utilizing the LGAP system, the

MPWH, in conjunction with MoF, could establish additional funding on top of the current basic

housing funds, through a High Capacity Fund accessible only to high performing LGs. The High

Capacity Fund also serves to allow MPWH to connect funding with monitoring oversight that has

previously been lacking in the system.


MPWH should continue to maintain a basic funding pool for all local governments regardless of

capacity, but it can supplement this with additional program funding that is used to incentivize

improved accreditation and performance of local governments. This funding can initially be

allocated on a fi rst-come, fi rst-served basis based on readiness to engage in immediate housing

production. Later annual funding rounds38 may reduce emphasis on readiness (as more local

governments become ready) and increase emphasis on performance, capacity growth, impact,

and other factors.

In this way, central government can work towards standardizing and streamlining local government

activities - including planning, programming of activities, as well as improving the functioning of

local market - by making implementation of certain reforms39, SOPs, or trainings a pre-condition

for accessing program funding.

4. Establish Minimum Housing Standards that are Flexible to Local Conditions

This Roadmap recommends that the MPWH establish a Task Force to defi ne clear and fl exible

construction standards for the minimum housing conditions that will be considered adequate,40

taking into account different climate, verticality, and housing typology features. Minimum standards

will take into account regional variations, and will consider the budget constraints of low-income

households, as well as the public sector, to inform specifi c government programs. This activity

will involve the highest-level commitment so that the minimum standards are applied across

government actors and housing producers.

During establishment, the Task Force would need to agree on their role and functions and create

standard operating procedures, with a vision to reconvene and recalibrate the minimum housing

standards on a regular – likely annual – basis.

A similar Task Force has been established previously and should be renewed to refl ect the current

market characteristics. Members of the Task Force would be assigned from relevant Ministries,

and will include voluntary engagement of private sector associations as well as representatives

from civil society, particularly those who work with the urban poor41.

The Task Force could consider taking on other responsibilities, including convening working

groups to explore new approaches and technologies or designs to improve cost and quality of

housing that could be presented to public sector entities for consideration.

5. Invest in Housing & Settlements Management Information Systems

Within the MPWH, a Housing and Real Estate Information Center (HREIC) can be developed to

serve as a repository of reliable, up-to-date, and publicly available housing and real estate-related

data. The HREIC’s main responsibilities would be to work with local government, line ministries

(Ministry of Agrarian Affairs and Spatial Services / BPN, DG Tax, People’s Welfare, Home Affairs,

38 Criteria and conditions of funding allocation should be revised on an annual basis to incorporate learnings from programs and shifting national policy objectives.

39 For example, streamlining and increasing transparency of building permits, fast-track approvals for affordable housing that comply with government standards, introducing land value taxation etc.

40 Minimum construction will include construction standards, minimum fl oor plans, mandatory building or apartment amenities and feature etc.

41 Non-government and private sector interest groups can be immensely helpful, both technically and politically. Technically, private sector and community groups bring real-world insight into how systems are working. Politically, giving these actors the opportunity to shape construction standards defuses suspicion, builds confi dence and commitment to implementation and self-governance of these standards.

87 | Annexes

etc.), public sector entities (BI Real Statistics Division, SMF, Askrindo, BTN, Perumnas, etc.), and

private sector entities (APERSI, REI, research agencies, etc.) to collect all housing and real estate

related data.

With the collected data, the HREIC can build capacity to analyze and report out at regular intervals,

some key housing indicators as outlined in Figure 9. These key indicators are not only critical in

planning, investment and public program development but also in affordability analyses.

Figure 9. Important Housing Sector Indicators

Green: Published indicators; Grey: Not available indicators

• New Housing Starts (Permits, Under Construction)• Finished stocks (Ready for Sale)• Rental Stocks

• Housing Sale Volume

• Household Income

• Housing loan products

• Mortgage rate• Loan Outstanding & Origination• NPL’s• Foreclosure

• Median Home Price• Rental Rate• Home Price Index• Construction Cost Index

Supply

Pricing

Demand

Financing

In addition to the housing indicators stated, the HREIC should also monitor all public housing

related programs to analyze effectiveness of government spending, impact on end consumers

and key learnings. Additional surveys can also be done by the HREIC alone or in conjunction with

public entities such as BI and BPS to extend knowledge of the housing market and consumers’

needs and behaviors that are not otherwise available through the data collected.

Once the HREIC is well established, an annual housing sector status report can be published that

provides robust analyses of trends of Indonesia’s housing and real estate sector, including aspects

on housing supply, demand, home prices and public housing program performance.

6. Build an Effective Housing Affordability and Targeting System

Getting the targeting right is an essential pre-requisite for the success of any program and an

extremely important mechanism to ensure that public spending reaches the poorest. MPWH

should conduct ongoing targeting and affordability studies to guide housing sector policies and

programs. Under the HREIC, the MPWH can establish or designate a research and analysis unit

that would be responsible for ongoing affordability analysis and strategizing for subsidy targeting,

based on needs and priorities, so that policies can be regularly updated in line with changes in

market dynamics.

Development of an income or consumption-based targeting system could improve effi ciency

of public spending, by creating transparent eligibility and qualifi cation of benefi ciaries across

programs. Flat or progressive demand-side subsidies could be introduced for the incremental

housing program or as down-payment assistance in the redesigned FLPP program, building off

an enhanced targeting system.


Where possible, this system should further expand local governments capacity in targeting and

benefi ciary selection, and utilize existing central government infrastructure. For the bottom 40%,

the TNP2K, an integrated database of Indonesian households for the targeting of social assistance

programs can be used to identify eligible households. This will allow government to maximize

integration with other central government assistance programs and not create replication or a

parallel system.

The Research Unit within HREIC could be responsible for the following activities, consistent with

an overall strategy for establishing targeting and affordability levels for the sector:

A. Development of Housing Indicators:

1. Home Ownership Rate needs to be further fi ne-tuned from the current BPS defi nition of non-

ownership, as those households with greater than one family may have home ownership

needs that are currently not being accounted for.

2. Housing Defi cit needs to capture both quantitative and qualitative needs. The quantitative

defi cit could be achieved through additional BPS questions to fi ne-tune the census

statistics, while the qualitative defi cit needs to address the combination of factors that refl ect

substandard housing (e.g. crowding effect with 7.2 m2 as the basic area per person; lack of

standard utilities such as water and sanitation; and poor quality materials for fl oor, roof and

wall).

3. Imputed Housing and Housing Related Cost / Household Expenditures. The ratio is available

in the BPS Susenas and can be used more actively to assess affordability levels, taking into

account that lower deciles can spare a smaller percentage of income on housing.

4. Median Home Price / Median Household Income. This ratio can easily be tracked to act as

an important indicator for affordability, which allows easy comparisons with regional and

international peers.

B. Segmentation Analysis:

The Research Unit can also be responsible for carrying out market segmentation analysis to

understand behaviors and needs of low-income household more deeply. Important data for

analysis include breakdowns of housing characteristics and needs by province and major districts,

household expenditures; head of household age, employment and education; home ownership

status; and home types (landed houses, vertical units, row houses, etc.).

C. Affordability Analysis:

An affordability analysis can start with developing a view of household income by population

deciles, as the difference between household income and household expenditures that is recorded

by BPS via the Susenas survey yields household savings or funds available for investment in

housing purchase, improvement or extension.

In this Roadmap, the household income has been derived by using Median Monthly Minimum

Wage by provinces (as defi ned by Ministry of Labor) multiplied by the number of working adults

per household. This household income indicator could use further investigation and checks

and balances to fi ne-tune over time. Using examples of existing housing loan products that

are available (from the microfi nance sector, subsidized loans and commercial loan), maximum

home prices can be calculated for different income segments in different geographies. In order to

ascertain affordability, these maximum home prices can be compared to the costs of construction

of a minimum standard unit, in different geographies and even within cities (peri-urban vs. central

city locations.

89 | Annexes

The Research and Analysis unit in MPWH should carry out this analysis and can also develop

online tools and trainings for local governments to carry out this analysis in order to determine

the targeting and need for subsidies toward making decent housing affordable for low-income

households.

7. Elevate the role of Pokja as Lead Housing Reform Coordinating Body

The Inter-Ministerial Committee for Housing and Settlements or Pokja PKP, has already become

an important platform for coordinating, discussing and informing decisions on housing policy and

program development, across central level ministries and agencies.

The role of the Pokja could be further developed by elevating its mandate to become the entity

that is responsible for implementation of the Roadmap, including the necessary coordination,

review and quality control activities, as well as putting in place a specifi c work program that

formally outlines a set of technical tasks that are needed to prepare and deliver the actions of the

Roadmap.

These activities could include validation of the policy reform agenda and consensus-building

amongst central-level agencies, review of the regulatory environment to propose necessary

national-level reforms in coordination with program design and development, specialist activities,

such as defi nition of fl exible housing standards and legal mechanisms available to recognize

informal settlements, as well as means of strengthening enforcement of regulations.

8. Support the Development of a Network of Reputed Professionals

Develop a system for registration and qualifi cation of real estate professionals through a Builder’s

Council dedicated to the industry of residential property development, to help establish and

enforce developer quality standards.

This council could pre-qualify private sector actors for government housing programs, based on

criteria developed with MPWH, provide input into government’s minimum construction standards

and design of programs and delivery systems, and help to report on housing-related statistics

to complement those being produced by government. The council would formally recognize

and work across REI, APERSI and non-members, qualifying developers based on performance

and merits. The council would also play an important role in self-governance, holding members

responsible for meeting performance and ethical (anti-corruption) standards and expelling any fi rm

or individual violating these standards.

This council would also facilitate peer-to-peer learning and networking, conduct certifi cation

of entities and professional executives, prepare and carry out trainings to develop technical

capacities in Indonesia’s real estate sector, support new market entrants and small contractors,

and create a network of housing professionals. These trainings could cover technical modules in

land acquisition and development, site design, construction techniques, development fi nancing,

sales and marketing and procedures for long-term property management.

Implementation Plan

Not all recommendations should or can be executed at once. The following table proposes

an implementation sequence, which requires making an immediate political commitment to a

series of actions, then designing the fi rst order activities (including, establishment of a housing

management information systems (MIS) and carrying out the detailed affordability and targeting

assessment), before implementing the rest of the action plan in sequence.


Table 11. Priorities and Sequencing

Immediate

(0-12 month)

Short-Term

(1-2 years)

Long-term

(3-5 years)

Action 5.1: Build a System for Local Government

AccreditationDesign Establish Ongoing

Action 5.2: Create a Technical Assistance Facility for

Housing and Settlements-- Establish Ongoing

Action 5.3: Design Program Delivery Systems Design Establish Ongoing

Action 5.4: Establish Minimum Housing Standards and

Costs Establish Ongoing Ongoing

Action 5.5: Invest in Housing Information Systems Design Establish Ongoing

Action 5.6: Build an Effective Housing Affordability and

Targeting SystemEstablish Ongoing Ongoing

Action 5.7: Build a Work-Plan for the Pokja to

coordinate Roadmap ImplementationEstablish Ongoing Ongoing

Action 5.8: Support the Development of Network of

Real Estate Professionals-- Establish Ongoing

Annex 4.2 Slums and Settlements42


The key challenges to improve slums and informal settlements in Indonesia, which have been

identifi ed through the studies related to SAPOLA, are the following:

1) There is no clear offi cial defi nition of slums.

2) Illegal/squatter settlements are not addressed in any laws or existing programs.

3) Local governments generally do not prioritize or fi nance slum upgrading.

4) Central government driven and implemented programs have not been sustained.

5) Regularization of tenure security is usually not addressed, and there is limited land available

to resettle settlements that cannot be upgraded.

6) Housing is seen as a private good.

Defi nition of Slums

The defi nition of a slum in Indonesia’s Law No. 1/2011 on Housing and Settlement Area is

premised on both housing (perumahan kumuh) and neighborhood areas (permukiman kumuh).

The fi rst refers to housing with inadequate living space. The second subsumes underserved slum

neighborhoods, insuffi cient infrastructure services and low construction quality.

The National Socio-Economic Survey (Susenas) published by the Central Statistical Board (BPS)

enumerates slums using the number of households that live in ‘non-livable houses’ (RTLH) and

42 This section is drawn from the SAPOLA Summary Report, November 2014.

91 | Annexes

the total number of slum households (Rumah Tangga Kumuh). These two criteria are used

offi cially to enumerate slum households in Indonesia, for example, in the Indonesian reports on

the Millennium Development Goals (MDG) and in reports of the Ministry of Housing. However,

because this metric does not capture neighborhood information, it is diffi cult to use the BPS data

to implement spatial programs and policies. The Ministry of Public Works (Directorate General of

Human Settlements), on the other hand, emphasizes the physical extent of a slum and its location

based on the neighborhood area. MPWH uses data from various sources at the city/district level43,

the basis for which differ from city to city. These two methodologies for enumeration have resulted

in signifi cantly different estimates in terms of the extent of slums in Indonesia.

According to the MDG Report (based on BPS data), in 2011, around 12.2% of the urban population

or approximately 3.9 million households resided in units that lacked safe water and adequate

sanitation.44 This was a quarter of the total urban population. At the same time, the latest data on

slum areas as measured by the Ministry of Public Works45 reveals that the extent of slum areas

is currently 37,407 Ha, spread over 3,286 slum locations in 2,870 villages in Indonesia. In order

to target and monitor a national program for slum alleviation, it will be necessary to agree on a

common defi nition and methodology for enumerating slums, whether by households, locations

or a combination of both.

43 Such as: i) Slum data updating in 127 cities/district in 2013, ii) Data from SPPIP documents for 222 cities/districts, and iii) Slum Decree stipulated by 28 cities/districts government.

44 Susenas and MDGs Report, BPS.

45 The Directorate General of Human Settlements carried out a Quick Count in 2014, measuring settlements in 33 provinces (excluding DKI Jakarta Province) using a rapid assessment method.


Table 12. Slum Areas and Distribution by Province

No Province

Susenas(2013)***

Directorate of Settlement Development,Min. of PW (2014)

Proportionof UrbanSlum HH

Numberof UrbanSlum HH

# ofCity/

District

# ofSlumSub-

District

# ofSlum

Village

# ofSlum

Location

SlumArea(ha)

1 NAD (Aceh) 9.56% 30,774 23 139 401 403 6,974.97

2 North Sumatera 11.44% 177,879 33 37 74 71 849.83

3 West Sumatera 14.93% 69,710 19 24 54 38 560.81

4 Riau 7.33% 41,255 12 44 90 87 1,095.68

5 Jambi 10.09% 25,458 11 65 88 81 1,388.79

6 South Sumatera 15.09% 103,129 17 14 47 48 519.77

7 Bengkulu 10.85% 15,258 10 26 46 46 425.36

8 Lampung 11.74% 61,360 15 51 113 146 1,724.20

9Bangka Belitung

Islands5.40% 8,967 7 22 33 35 530.99

10 Riau Islands 11.68% 47,381 7 18 29 29 1,002.55

11 DKI Jakarta* 25.99% 681,933 6 - - 223 1,024.52

12 West Java 14.03% 1,129,177 27 94 217 275 2,289.76

13 Central Java 5.05% 207,312 35 117 379 438 4,235.84

14 DI Yogyakarta 3.50% 25,342 5 19 41 82 178.83

15 East Java 7.75% 392,904 38 62 124 146 2,957.20

16 Banten 14.60% 273,250 8 22 40 51 489.22

17 Bali 13.23% 85,021 9 18 50 67 415.38

18 West Nusa Tenggara 17.45% 95,193 10 38 80 120 1,644.51

19 East Nusa Tenggara 20.36% 42,323 22 28 79 117 855.56

20 West Kalimantan 4.30% 14,019 14 20 34 35 732.27

21 Central Kalimantan 12.80% 26,223 14 15 32 35 647.92

22 South Kalimantan 10.77% 47,234 13 21 50 63 965.21

23 East Kalimantan** 7.89% 47,067 10 28 42 46 996.23

24 North Kalimantan - - 5 7 14 16 298.35

25 North Sulawesi 14.88% 40,695 15 110 169 169 645.62

26 Central Sulawesi 12.55% 20,231 13 20 52 53 152.53

27 South Sulawesi 8.65% 61,575 24 50 126 166 1,085.17

28 South East Sulawesi 16.34% 24,394 14 60 153 153 1,128.27

29 Gorontalo 18.32% 15,907 6 11 33 36 258.88

30 West Sulawesi 21.18% 13,306 6 14 39 65 353.44

31 Maluku 19.56% 24,617 11 10 36 48 251.14

32 North Maluku 13.38% 8,423 10 22 46 46 507.25

33 West Papua 18.40% 10,129 13 14 21 30 544.71

34 Papua 20.48% 37,555 29 16 38 45 701.02

Indonesia 12.10% 3,905,003 505 1,256 2,870 3,286 37,407.26*) Directorate of Settlement Development Data excludes DKI Jakarta slum data. Data on DKI Jakarta is based on

“Evaluation of DKI Jakarta Slum RWs 2012”.**) Susenas Data on East Kalimantan includes North Kalimantan.***) Susenas Data uses “number of urban household” based on Population Projection 2010-2035.Sources: Susenas-MDGs, BPS (2013); Slide Presentation, Directorate of Settlement Development - Ministry of Public Works (2014); Evaluation of DKI Jakarta Slum RWs (2013)

93 | Annexes

Illegal/Squatter Settlements are Systematically Ignored

The infl ux of rural migrants into cities contributed to the emergence of illegal settlements along

riverbanks, rail-lines, underpasses and other vacant lands. The term ‘squatter settlement’ is used

to describe those areas where people put up their homes on land that does not belong to them

and for which they lack legal authorization, leases or building permits. Such neighborhoods arise

contravening the construction and planning regulations.

Squatter settlements account for a large proportion of urban slums. However, municipal authorities

do not recognize squatter settlements, which are systematically left out of any spatial or housing

plans, while government data and programs exclude such settlements. In some cities, residents

who live in squatter settlements do not get an ID card and therefore lack access to health,

education, sanitation and other services. The cost of this lack of recognition is therefore unknown

and unappreciated by municipal authorities.

Local Governments Generally do not Prioritize or Finance Slum Upgrading

In 2007, government regulation decentralized housing and settlement matters to local governments.

However this was not accompanied by appropriate guidelines, capacity building, organizational

restructuring, or fi nancing to achieve minimum service standards. In most local governments,

there is a tendency to view slums and squatters as a burden (and to try and push them out to the

periphery whenever possible). Many local governments have not developed a good understanding

of the contribution that slum dwellers make to the economic and social well-being of the city or the

negative externalities (related to health, productivity, etc) associated with slum conditions.

Issues related to slums and low-income housing straddle different line agency jurisdictions. As

such, without a strong commitment from the Mayor or Bupati, these issues fall through the cracks

because of a lack of responsibility and coordination. Few local governments have established a

dedicated housing agency (exceptions are Jakarta and Medan), and local governments do not

tend to prioritize slum upgrading and low-income housing.

At the same time, local governments that have acted on urban poverty and slums have

demonstrated an ability to move forward with remarkably successful city-level programs such

as the Pekalongan City Without Slums by 2010 Program, the Solo Resettlement Program, the

Surabaya Rental Housing Program and the Palembang Urban Renewal Project. The impacts of

these programs have been limited mainly by lack of resources and land availability.

Central Government Programs have not been Sustained

It should be recognized that in the past, Indonesia spearheaded some of the most expansive

and comprehensive slum upgrading programs in the world. Through the 1970s and 1980s,

the Kampung Improvement Program (KIP) and its subsequent iterations promoted the concept

of Tribina (physical, social and economic improvement in slums) and had signifi cant success.

However, as a centrally driven and implemented program, it scaled back once central government

interest and support started to wane.

In 2003, the central government started a new initiative, the Neighborhood Upgrading and Shelter Sector Project (NUSSP) funded by the ADB. The NUSSP supported shelter planning,

access to fi nance, neighborhood upgrading/site development and strengthened sector institutions.

However, as yet another centrally implemented program, it has had limited reach.


More recently, the National Program on Community Empowerment or PNPM Urban was

modifi ed to include a component on Neighborhood Development (ND), which is intended to

improve living conditions for the poor by empowering and fi nancing communities to develop local-

level spatial plans and undertake their own investments in infrastructure improvements. Although

this program has already established community groups across more than 60 cities and has

shown some success, activities are limited by the fact that communities are unable to plan and link

tertiary-level investments with larger city infrastructure networks (like water supply and drainage).

Other programs have been piloted such as the Community-Based Housing Development Project/CBHD/P2BPK (1990) to support community-driven housing and the UNDP fi nanced Co-BILD Project (2000) to test the viability of a housing fi nance mechanism based on market rates

of interest. In spite of their successes, none of these programs have been scaled up because of

their lack of integration with national policy priorities.

Previous Programs have Generally not Dealt with Land and Security of Tenure

The price of land has increased radically over the past few years because of the lack of instruments

to regulate land markets and limit speculation. Vacant urban land is in short supply in Indonesia

and land in suitable locations is too expensive for government to purchase and make available at

affordable prices for low-income housing. Thus, the urban poor have often resorted to their own

means of fi nding land to settle on.

Many slum settlements are legal in that slum dwellers have some form of right to the land, but

have not registered the land/building in their names either because there has been little incentive

to do so, or because their houses do not conform to regulations. Many settlements are on land

that belongs to the government (local government, line ministries, SOEs), which has been lying

unused, but because residents do not have a formal right to the land, they are unable to get

services. Others are illegally encroaching on privately-owned land.

Past government upgrading programs have focused on settlements that are “legal”, and have

failed to tackle the more diffi cult problem of enabling slum dwellers to stay on the land they have

been living on for decades and providing them with some form of tenure security. There have been

some programs for land registration of slum dwellers but these have usually been implemented

separately from upgrading programs and have had limited success.

The principle of tenure security has been largely interpreted by local governments in terms of the

letter of the law and fails to factor in customary law, the residential history of the slum dweller, or

fl exible forms of tenure that might allow improvements without outright provision of freehold title.

This is not to say that all settlements need to be “legalized”, as settlements on hazardous land,

reserved land (e.g. watershed), and land required in the short term for strategic purposes, cannot

be upgraded and will need to be resettled. However, given the acute shortage of urban land,

any national program on slum upgrading will need to examine the extent to which land already

occupied by slum dwellers can be provided to them legally.

Lessons Learned from Previous Slum Alleviation Initiatives

Given Indonesia’s extensive experience with slum upgrading, both through central and locally-

implemented programs, many lessons have been learned that should be incorporated to ensure

95 | Annexes

the success of a comprehensive national slum upgrading policy and implementation framework.

The key lessons are as follows:

•Community empowerment and participation at every stage of planning and implementation is

key to ensure sustainability. Experienced facilitators or social mobilizers are needed to assist

communities to plan and execute slum alleviation efforts and build decent homes (Mojosongo,

Gunungsari Ilir Balikpapan, Palembang, KIPs, etc).

•The commitment and political will of the Mayor/Head of Regency (Bupati) is critical to the

success of slum alleviation. Committed Mayors in Pekalongan, Solo, Yogyakarta, Surabaya,

and Palembang have increased the budget for housing and settlements and have improved

slums irrespective of land tenure status (which is often cited as a roadblock to providing

infrastructure and services in slums).

•It is possible to make the land that slum dwellers are currently living on “legally” available to them

through well designed programs of land regularization, land sharing and land readjustment

(Mojosongo, Gunungsari Ilir Balikpapan, 12 Ulu, Palembang, post-disaster areas).

•Granting some form of security of tenure can strengthen the fi nancial capacity of the community

as their land can be used as collateral for housing improvement loans (Mojosongo, Balikpapan

and Palembang). However, affordable housing fi nance needs to be linked to upgrading

programs and mechanisms need to be developed to enable slum dwellers with informal and

irregular incomes to access loans.

•Slum upgrading programs that focus on improving tertiary infrastructure at the neighborhood

level, without considering the impact on the broader network have often not worked optimally

or have resulted in worsening conditions in other neighborhoods. (For example, proper tertiary

drains in one area have caused increased fl ooding in an adjacent neighborhood because

they are not adequately connected to a secondary network that drains wastewater etc.). The

improvement of infrastructure in urban slum areas therefore needs to be integrated with city-

wide infrastructure networks.

•Certain aspects of infrastructure maintenance can be managed by communities; for example,

road and footpath maintenance, local solid waste collection, and the upkeep of drains. Other

aspects, such as the illegal dumping of solid waste, the integration of kampung infrastructure

with city-wide networks, and the effects of pollution are beyond the control of communities and

need to be managed by local governments.


In formulating a national slum upgrading strategy and action plan, the Roadmap calls for the

adoption by central and local government of the following key principles:

1. Housing is a basic human right, and residents, legal or illegal, should be protected from arbitrary

eviction.

2. Local governments should take the lead in designing, implementing and monitoring the

program. Central government should provide national resources, technical support and create

an enabling environment to allow them to do so.

3. Community participation is key to the success and sustainability of the program and should be

mandated its design, implementation and supervision.


4. To be successful, slum upgrading programs need to take a comprehensive approach,

encompassing tenure security, physical improvements, access to social infrastructure,

employment, and safe housing. This will require coordination across line agencies and

integrated planning with other programs.

5. Slum upgrading and investment in slums should be seen as an integral part of broader city

development and be included in the city’s spatial and investment plans.

Based on these principles, the Roadmap proposes an action plan to address urban informality

and to identify and alleviate slums. This action plan includes: (i) the design of a national program,

which builds the technical, institutional and fi nancing framework for city-led slum mapping and

action plans for slum upgrading, redevelopment and resettlement; (ii) launching of the program

with a select set of interested and committed large cities, and (iii) scaling of the program to a

broader set of cities and areas. Specifi cally, the following strategic objectives are proposed:

1. Find ways to allocate land for the urban poor:

a. Recognize and/or regularize existing informal settlements where possible.

b. Identify land ownership of existing illegal/squatter settlements and attempt to obtain land

from owners and/or introduce mechanisms for land sharing/land readjustment where land

cannot be regularized.

c. Develop and enforce regulations to make more land available for low-income housing (ensure

implementation by private developers of the 1:2:3 rule; allocate existing local government

owned land for low-income housing; negotiate with government entities to reserve some

of their land for low-income housing; appropriate abandoned land and reserve it for low-

income housing).

d. Improve land management information systems to improve transparency and limit property

speculations.

2. Build local government awareness and commitment for slum upgrading:

a. Strengthen the role of central government in charging and supervising local government

with the implementation of slum upgrading activities.

b. Enhance awareness of local governments on the need for slum upgrading and low-income

housing.

c. Design a robust monitoring and evaluation system with specifi c targets and performance

indicators (based on an agreed defi nition of slums), and provide resources for slum

upgrading and housing so that local governments are facilitated to prioritize this need.

d. Develop enabling legislation to facilitate local governments actions (e.g. for provision of

services to illegal settlements; for including slums and low-income housing in planning, etc.)

3. Create an enabling institutional framework and build capacity at the city level for planning and implementing integrated slum upgrading programs:

a. Establish a specialized agency at the local level to address local slum and affordable

housing challenges.

b. Establish local working groups on housing and settlements, including members from

NGOs, CBOs, academics and others.

c. Strengthen local government capacity for mapping slums and planning programs through

97 | Annexes

the development of methodologies and operating procedures, provision of training, and

creation of technical assistance facilities.

d. Strengthen local government capacity for formulation of annual investment programs on

slum upgrading as part of city-wide annual infrastructure/capital investment programming

through preparation of guidelines and training.

e. Strengthen local government capacity for technical and institutional coordination of a

comprehensive program, and for management and monitoring through preparation of

guidelines and training.

4. Create funding instruments to support slum upgrading programs:

a. Increase national budget to support slum upgrading and housing and create a funding

instrument to transfer resources to local governments (this can be competitive and/or

based on demonstrated capacity and commitment of the local government).

b. Design and operationalize a system to incentivize allocation of municipal revenues for slum

upgrading and housing.

c. Identify and mobilize alternative sources of funding (Corporate Social Responsibility, Public

Service Obligations, PPPs, etc.).

d. Monitor use of funds and calibrate subsequent funding based on achievement of targets

and performance indicators.

5. Create a enabling framework for affordable housing delivery, including self-help and community-based housing:

a. Support the establishment of a housing resource center at the local-level to support self-

help and community-based housing, including universities, CBOs, NGOs, and others.

b. Develop a subsidy mechanism for housing for the poorest, including for self-help and

community-based housing (refer to Action 2 and Action 3).

c. Explore instruments to improve access to affordable housing fi nance, particularly for slum

dwellers who are informally employed (refer to Action 6).

Roadmap Implementation

The national slum upgrading program is proposed to be rolled out in three phases: preparation in

the immediate-term (0-12 months); planning in the short-term (1-2 years), and implementation in

the medium-term (3-5 years).


Figure 10. Proposed Slum Upgrading Implementation Framework

PREPARATORY

PHASE

(2014)

PLANNING & DESIGN

PHASE

(2015)

IMPLEMENTATION PHASE

(2016-2019)

Consensus on

National Policy

Defi ning

Implementation

Scheme

Advocacy to Local

Governments

Submission

of Interest

LO

CA

LN

ATIO

NA

L

Training on Slum

Mapping and Management

Framework (Bukuh Putih)

Planning and Budgeting

Coordination and

Synchronization (Regional

Consultation Meeting/

Rakonreg, Pre National

Development Plan

Meeting/ Pramusrenbangnas)

Training on City Strategy and

Action Plan for Slum

Alleviation

Allocation of Matching Fund

Formulation of Program and

Activity on Slum Alleviation

Approval of City Strategy and

Action Plan

Establishment of Working

Group

Formulation of “Buku Putih” Program Implementation

Recruit and Train

Faciliators and Consultants

Program Design

Immediate Actions: Preparatory Phase (0-12 months)

Consensus on National Policy & Implementation Scheme

This step is intended to elicit consensus amongst members of the Inter-Ministerial Working Group

on Housing and Settlements (Pokja PKP). The results and recommendations of the SAPOLA

studies have been adopted by the Working Group through the Launch of the National Slum

Upgrading Program at the end of 2014. Agreement is also needed to ensure coordination and

synchronization with on-going/pipeline programs in different ministries.

Advocacy to Local Governments

This is intended to communicate national priorities on slum improvement and prevention to all

stakeholders at the city/district level. The national Working Group will engage Provincial Working

Groups and Local Working Groups. Advocacy will be targeted at both locally-elected leaders

(Mayors/Heads of Districts) and local legislatures to adopt the national policy. Local governments

will be expected to establish a city-level inter-departmental working group on housing and slums,

99 | Annexes

allocate local budget for slums and adopt a city-wide slum strategy. It might be useful to commission

city-specifi c studies that explore the externalities of slums and the costs of not addressing slums

in that municipality. This advocacy will initially be carried out by SAPOLA in several proactive cities

i.e. Malang, Medan, Palembang, Jakarta, Surabaya, Banjarmasin and Makassar. Afterwards, the

Ministry of Public Works and Public Housing, as the key agency responsible for the national

program, will organize advocacy and dissemination to the remaining cities.

Submission of Interest

The cities/districts that fullfi l the eligibility criteria which is developed, can submit their interest for

supplementary central government funds to the National Working Group.

Short-Term Actions: Planning and Design Phase (1-2 years)

The planning and design phase will take place through 2015. As a baseline, the targeted cities/

districts will use the slum mapping/quick-count data compiled by the Directorate General of Human

Settlements at the Ministry of Public Works and Public Housing. Cities/districts will be prioritized

according to: a) location in National Strategic Areas (KSN/PKN); b) availability of a Detailed Spatial

Plan and Zoning Regulations (RDTR/PZ); c) establishment of local Working Group on Housing and

Settlements; iv) allocation of funds under the local budget; and iv) innovative proposals.

At the national level, this phase will include:

•Program design, including development of targets and performance indicators, institutional

arrangements for implementation, monitoring and evaluation, and mechanisms for channeling

funds.

•Recruitment of consultants for the preparation of guidelines on social mobilization, slum

mapping and city strategy formulation and training of trainers.

•Recruitment and training of facilitators.

•Training of government offi cials and stakeholders on the Slum Mapping and Management

Framework (Buku Putih) and the formulation of City Strategies and Action Plans.

At the city level, this phase will include:

•Establishment of a Working Group on Housing and Settlements (legally established through

Decree of the Mayor/Head of District).

•Mapping of slums and defi ning a management framework (Buku Putih), including the

identifi cation of legal/illegal slums, growth trends, physical, social and economic characteristics;

cadastral maps, spatial maps, aerial photographs and community consultations to be used to

prepare maps and digitized them.

•Defi ne a city-specifi c strategy on slum improvement and investment, through (i) classifi cation of

slums into those suitable for on-site upgrading, and those which are vulnerable to disaster risk

and need relocation, (ii) categorizing slums based on the status of land tenure and ownership

of land, type of residence, and density; (iii) undertaking a site analysis; (iv) designing strategies

for community participation and institutional capacity building, and (v) developing a phased

program of activities and investments for relevant municipal agencies to implement.


•The City Strategies and Action Plans should be approved through a Decree of the Mayor/Head

of District and communicated to the local parliament to ensure commitment and adequate

budgets. The approved City Strategies and Action Plans will then need to be operationalized

in an Annual Program on slums to be carried out by relevant municipal line agencies.

Medium-Term Actions: Implementation Phase (3-5 years)

•Targeted cities/districts that participated in the planning activity in 2015 will implement the

program from 2016 to 2019. This implementation will follow the annual planning and budgeting

process at the Regional Consultation Meeting (Rakonreg) and the National Development

Planning Meeting (Musrenbangnas).

•Cities/Districts will implement activities with local funds allocated in 2015 and supplementary

resources from central line agencies.

•Beside the implementation phase of the fi rst batch of targeted cities/districts, other new cities/

cities that have submitted their interest, will participate in a planning phase in fi scal year 2016

and repeat the same process and steps.

•It is expected that implementation will begin in about 50 cities in 2016, and 79 cities in 2017 (a

total of 129 priority cities under the National Strategic Areas), with the remaining cities following

thereafter.

Annex 4.3 Urban Land Policy


Principles of Urban Land Policy

In the context of high land values and overall land shortages, it is essential at the outset to establish

key principles for the provision of land for affordable housing in Indonesia. Without the adoption of

these principles, land provided for affordable housing is unlikely to sustainably meet the needs of

the poor, and the urban poor are likely to come back into inner cities and continue to form slums.

These principles are:

•The poor have a right to the city as with all other citizens, and need land in locations where they

can earn a living wage

•Just as laws/regulations establish the need to reserve land for “green space”, it is vital to

reserve land specifi cally for low-income housing, even in areas of high land value.

•The primary role for government should be to regulate land and housing markets in the public

interest.

Key Issues

Land and housing markets are not meeting the needs of the majority of the urban population.

There is a possible over-supply at the top end of the market due to a private sector focus on

meeting higher income needs. At the low end of the market, private sector supply is minimal and

public sector provision is inadequate. As a result, a large proportion of the urban population lives in

a range of informal settlements with inadequate tenure security and poor access to basic services.

101 | Annexes

Government appears to consider the provision of housing for the urban poor as a welfare burden

on the economy that is best addressed by supplying subsidized housing in peripheral locations

where land costs are lower. However, the urban poor themselves regard housing primarily as part

of economic development and locate on marginal land in vulnerable locations or pockets of public

land in central urban areas where they can maximize livelihood opportunities. Housing quality is

therefore a lower priority for the urban poor than accessibility to economic opportunity. As such,

it is essential to integrate housing policy within the broader economic and spatial framework of

urban development.

Whilst Indonesia has been undertaking an ambitious program of decentralization since 1999, and

responsibility for the provision of land for low-income housing is now the responsibility of local

governments, their capacity to deliver has not yet increased to the level required to meet needs.

Land Demand for Housing

Rapid urban growth during recent decades has increased pressure on land in urban and peri-

urban areas. The number of housing units needed nationally to address the current backlog is

estimated at up to 13.5 million and this does not include additional units required to accommodate

new household formation in the years ahead. The area of land required to accommodate both

categories will depend upon the forms of housing to be provided and the net and gross density

levels implied by offi cial norms. A full urban land needs assessment will be required in preparing

detailed housing policy proposals, but initial estimates suggest a fi gure of at least 15,000 hectares

will be needed annually to meet the needs of low and middle income groups. Additional land

will be required for ancillary land uses. The preparation of an urban land needs assessment is

therefore an urgent requirement so that plans can be prepared to identify the areas and locations

where such land can be made available.

Land Supply for Housing

There are two main actors involved in the supply of land for housing in Indonesia, namely the

private sector and the public sector. Most private sector suppliers are members of Real Estate

Indonesia (REI), or Indonesia’s Housing and Settlement Association (APERSI - Asosiasi Perumahan

dan Permukiman Indonesia). REI members mainly provide housing for middle to higher income

groups, whilst APERSI members focus on lower to middle income groups. Each developer carries

out land acquisition by themselves and receives assistance from BPN during land administration

processes. In 2010, the Ministry of Public Housing issued a decree establishing the 1:2:3 regulation

(Permenpera No. 7/2013) requiring private developers to allocate two medium-cost and three

low-cost units for every high-cost unit. However, the implementing regulations have only come

into force recently, so it has rarely been enforced in most local jurisdictions and developers are not

eager to comply as they claim it makes developments fi nancially unviable.

Key public sector suppliers involved in housing provision nationally include Perumnas, the Ministry of

Housing, and the Ministry of Public Works (the Directorate of Settlement Development). Perumnas

was originally created as an SOE to be the major agency responsible for the provision of affordable

housing and initially was supported through government funding and programs during the New

Order regime. In later years, as government support for Perumnas has declined, the requirement

that Perumnas must make a profi t has increasingly prevented it from providing affordable housing

in favor of more profi table middle and high-end housing. Several Regional Government-Owned

Enterprises (ROEs) are also involved in housing provision, such as PT. Jakarta Propertindo and PT.

Sarana Jaya in the DKI Jakarta Province. The National Land Agency (BPN) assists these actors in

land administration processes.


Formal land supply for housing has failed to keep pace with demand. As a result, prices of well-

located and serviced land are estimated to have increased 20% annually during the last three

years and land is no longer affordable to the poor and even many middle-income groups. This

is largely because private developers and investors have acquired large land banks that they are

withholding from supply, whilst public agencies do not appear to regard low-income housing as

a priority. City level spatial plans (RTRW) are prepared without the involvement of the housing

agency. Detailed spatial plans (RDTR) and zoning plans do not specify areas for low-income

residential development.

For the last few decades, the gap between the demand and supply of land for housing has been

fi lled by an extremely effi cient and responsive informal sector, involving a range of social networks,

dealers who subdivide public land illegally, or rental housing on private land. An estimated 9 million

households, representing more than 40 million people, or a quarter of the total urban population,

live in housing that lacks safe water and adequate sanitation.

A further impediment to the operation of an effi cient land and housing market is the limited

coordination between national agencies responsible for land and housing and between these

agencies and local governments. For example, the local offi ces of BPN and the local government

authorities have a role to play in land registration, land use and zoning decisions, yet they often do

not have an active mechanism for sharing data and land use information.

Legal Framework

Land policy in Indonesia is primarily regulated by Law No. 5 (1960) on Basic Agrarian Affairs. This

law mainly classifi es land rights and their attributes and provides an overview of land survey and

mapping and land registration. In addition to the laws, the legal framework for land policy and

markets are also set by a number of government regulations, presidential decrees and ministerial

regulations. However, since Independence in 1945, Indonesia has not systematically repealed

previous land laws or established a hierarchy whereby higher laws take precedence over lower

ones.

Lack of clarity regarding tenure status is widespread throughout Indonesia. This is a major

impediment to local and foreign investment and represents the largest category of complaints to

the administrative courts. Land grabbing, forced evictions and coercion in urban and rural areas

disrupt livelihoods and the ability of the urban poor to escape poverty, posing an urgent need for

legislation to protect vulnerable groups.

The Spatial Planning Law was passed in 2007. However, there is still a lack of comprehensive

land use planning guidelines, approved urban development plans and transparency about the

process of acquiring and developing urban land for public purposes or housing. The legal basis for

acquiring land for housing or in the public interest is addressed by Law No. 2/2012, though this only

applies to rental housing on public land, but not owner-occupied housing, or private low-income

housing development. Terms for land acquisition for housing on private land are stipulated in Law

No.1/2011 on Housing and Settlements and Law No.20/2011 on Vertical Housing. In addition

to private land, these laws also stipulate that the source of land for housing and settlement or

vertical housing can be taken from waqaf land, state land formerly known as abandoned land, or

by land consolidation. In the case of vertical housing construction above land with building rights

(HGB), or construction above use rights over management rights (HGU over HPL), the developers

are required to resolve the status of building rights or use rights over the management rights in

accordance with the provisions of the legislation before selling the vertical housing unit.

Presidential Decree No. 34 of 2003 transferred nine land management functions from the BPN

to the local authorities. However, the capability of many local governments to undertake these

new management functions was constrained by limited fi nancial and technical resources. Despite

103 | Annexes

efforts at strengthening local government capacity, progress has been severely impaired due to a

lack of political commitment at the highest level and continuity at senior administrative level.

Urban Land Administration

Land policy in Indonesia is formulated by Bappenas and implemented by BPN, which is responsible

for coordinating land policies, plans and programs and guiding, monitoring and controlling land

administration. All regulations on land are made at central level and are uniform throughout the

country. Although BPN has offi ces at the local government level (Kantah), interaction and links with

the local government administration are minimal, and information is not shared.

Land and property taxes were established nationally by BPN based on 1995 values. However,

tax administration was decentralized in 2010 and 369 cities now collect these taxes, with rates

varying considerably from one jurisdiction to another. Property values have increased by three or

four times since 1995, so although the taxable values have increased, the property tax regime has

become regressive and denies local governments a valuable source of revenues. Tax rates also

vary according to land use, though collection rates do not necessarily refl ect the uses in practice.

As a result, property value systems are so complex that they risk deterring productive investment

on the one hand and being exploited by land and property owners on the other hand.

Land and property taxes are collected and retained in full by local governments for local allocation.

However, even in Jakarta, where a recent revaluation of property values has meant a huge increase

in property tax revenue, this revenue only represents a token percentage of Jakarta’s total revenue

as the tax rate is low by international standards. As much as 80% of all local government revenues

are a central government transfer (Dana Alokasi Umum or DAU) which is an equalization grant.

The DAU formula provides a clear disincentive to raise local government own-source revenue as

the greater the own-source revenue, the lower the DAU allocation. Thus, even though land and

property tax are important tools for managing the supply of land, the proper application of these

tools is discouraged in the current environment. In addition, land and property tax are combined

as one tax, which means that speculators owning large tracts of vacant land have a disincentive

to build on the land as they will have to pay a larger tax once they start building. This further

encourages land hoarding and underutilization.

The land and property transfer tax (BPHTB) is very high by international standards and is paid

by both buyers and sellers. The tax rate, together with the additional cost of VAT and brokers’

charges, results in massive under-reporting, which also affects the taxes paid by landowners and

contributes to the distortion of the effect of property taxation as a tool to manage land.

BPN retains land maps recording ownership details, though mapping is incomplete in urban

areas, and certifi cation and registration information is also incomplete. BPN is also responsible

for land registration. Costs are offi cially very low, though unoffi cial ‘donations’ may increase this

signifi cantly. As a result, many low-income households cannot afford to register their property.

Land tenure includes a complex mix of customary and statutory tenure regimes, though in

practice, the state controls almost all land in the nation. Customary tenure has acquired the force

of law through usage in rural and some peri-urban areas. Other forms of tenure and property rights

include HGU46, HGB47 and HPL48. It is reported that the process of land registration can take 6-12

months.

Computerized land information systems were introduced in 1997. However, progress in

computerizing land records or building private sector capacity has been limited. No systematic

46 Hak Guna Usaha (Land Use rights), granted for up to 35 years and extendable by 25 years (Law No.5/1960).

47 Hak Guna Bangunan (Building rights) granted for up to 30 years and extendable by 20 years (Law No.5/1960).

48 Hak Pengelolaan Lahan (Land Management rights), granted for up to 50 years extendable by 30 years (Government Regulation No.40/1996).


review of legislation for licensing of surveyors and assistance was undertaken, and no regulations

governing industry practice have been developed.

Urban Land Management

Land management is the process of managing the use and development in both urban and rural

settings of land resources. Land acquisition often involves burdensome and corrupt practices,

both for those whose land is being taken, and for those who are acquiring land. Problems include:

•Uncertainty over who holds rights to specifi c parcels of land.

•Problems in assessing land prices for compensation.

•Inadequate legal rules for land acquisition.

•The government’s willingness to favor investors at the expense of current landholders.

•The government’s willingness to use extralegal force and coercion to remove current occupants

or customary tenure landholders.

Spatial planning at national level is the responsibility of an inter-ministerial committee, BKPRN49. At

the local level, spatial planning is the responsibility of the local offi ces of Bappeda and Dinas Cipta

Karya, which discusses it in the BKPRD50 forum. Currently, Law No. 26/2007 on spatial planning

stipulates that 30 percent of urban land should be designated as protected areas, or green space,

while Government Regulation No.15/2010 on Implementation of Spatial Planning states that of

this total, about 20 percent has to be allocated from public land and 10 percent from within private

land. This requirement reduces the area available for residential and other productive uses and

raises unit land costs. If it can be justifi ed for purely amenity value, then there is an even greater

justifi cation for allocating a signifi cant proportion of urban and peri-urban land specifi cally for low-

income housing, at less than full land market prices. A fi nal concern with spatial planning is that

it takes 2 or 3 years to prepare spatial plans and developers move quickly to acquire land in key

locations, so land prices go up before the plans can be implemented.

Policies, Programs and Instruments to Improve Land Supply for Housing

Recent, current and proposed government interventions in the urban land and housing sectors

have focused on the following:

Slum clearance and relocation into rental housing. These programs tend to relocate settlements

in environmentally vulnerable locations, such as along riverbanks, to peripheral locations. They

may improve housing quality, but usually destroy communities and reduce incomes.

Land consolidation/readjustment programs. These were initiated in 1981 and by 1995, 132

projects covering 8,300 hectares had been undertaken in 25 provinces. Projects have been

hampered by an insuffi ciently developed land titling and registration system.

In-Situ Upgrading. The Kampung Improvement Program was launched in 1969 and expanded

nationally during the 1970s in several phases. The NUSSP51 upgrading program was launched

in 2003 and the national level PNPM52 Urban program has recently introduced a Neighborhood

49 Badan Koordinasi Penataan Ruang Nasional – National Spatial Planning Coordination Board.

50 Badan Koordinasi Penataan Ruang Daerah – Regional (Province or municipal/district) Spatial Planning Coordination Board.

51 Neighborhood Upgrading and Shelter Sector Project.

52 National programme for community empowerment (Program Nasional Pemberdayaan Masyarakat).

105 | Annexes

Development program which provides for infrastructure improvements by communities. These do

not increase land for housing but help reduce demand.

Rusunawa and Rusunami. Rental vertical housing (Rusunawa) and owner-occupied vertical

housing (Rusunami) are programs introduced by the Ministry of Public Housing.

Land Banking. GoI proposes to establish a land bank to acquire land for development at current

market prices and allocate it for public purpose needs, including housing. An estimated US$15

billion is proposed for initial capital to cover the anticipated costs.

The proposed ‘100 percent sanitation, zero slums, 100 percent water’ program is a major new

program and the new administration has committed to achieving this by the end of the 2015-2019

National Medium Term Development Plan (RPJMN).

Review of Current and Proposed Programs

The slum clearance and relocation program may provide better housing, but exacerbates the

economic problems facing the urban poor at high cost to the government. Few projects have

so far been undertaken. There is a risk that the poor will see this as removing them from the city.

Land consolidation/readjustment programs have been partially successful in Indonesia and very

successful in the East Asian region. They deserve another concerted effort at development.

Indonesia is a leading nation in the regularization and upgrading of existing informal settlements

and this experience can be put to good use in existing inner city settlements.

Land banking has been implemented in many countries but with serious limitations. These

include: potential confl icts of interest between the role of regulator and supplier of land; agencies

may increase demands more than is needed; appraisers will be vulnerable to corruption and; the

different needs of land for strategic purposes and land for low-income housing will be confused.

Experience shows that the issues being addressed regarding urban land and housing are systemic

and entrenched and refl ect differences in the distribution of power, wealth and opportunity. Unless

these structural imbalances are addressed, the symptoms of inequality, as refl ected in limited

access to land and adequate housing are likely to remain.


Given the wide range of issues involved, international experience shows that no single policy

instrument or agency can meet diverse needs within dynamic land and housing markets. It will

therefore be essential to develop a diversifi ed set of options and a suite of tools and build programs

around these to regulate land and housing markets in the public interest.

Legal Framework

• Change Law No. 2/2012, Presidential Regulation No. 71/2012 to include the submission of

business plans with development permit applications and require implementation of the plans

according to the development timeline. If land owners/developers do not comply within 3

years, their land can be repossessed and developed for low-income housing and other priority

uses. At the moment, the three year clause is by Decree of the Minister of BPN, but is not

backed by a law or a regulation, which needs to be developed. In addition, amendment of Law


No.2/2012 should also include the establishment of a land provisioning agency to acquire land

for public purpose, and incorporate land for housing using various instruments and different

land tenure options.

Urban Land Administration

It is recommended that the land tax (PBB) on unused or vacant land be increased to the same

level as if land were developed. This is intended to encourage land owners to develop their land,

increasing supply and reducing land price infl ation. It is also recommended that the existing

combined land/building tax rates be increased and the threshold for payment increased to protect

low-income groups.

It is recommended that the initial cost of land and building registration charges be reduced and

administrative procedures simplifi ed and subject to external oversight. It is also recommended that

the land/building transfer tax (BPHTB) be cancelled and replaced with an administrative charge to

cover the costs involved. This would increase transparency in urban land markets and cancel the

current practice of under-reporting. This action can be funded by increased land revenues.

It is recommended that consideration be given to granting medium term (10-20 years) communal

leases to informal settlements selected for in-situ regularization and upgrading. This is mainly to

protect inner city settlements in areas where land prices are high from being vulnerable to market-

driven displacement and is an adaptation of adat tenure which is well established nationally. Once

upgraded, individual Building Right permits for 20 years are recommended, as already applies in

selected projects. This will provide adequate incentive for households to invest what they can in

home improvements, build on traditional concepts of communal ownership, minimize the need for

individual plot boundary disputes and provide a simple administrative basis for improving tenure

security and protection from market-driven displacement. Furthermore, the possession of a land

certifi cate should improve access to microfi nance as a means to improve livelihoods.

‘One Stop Shops’ should be introduced for land titling, registration, transfers and permits, perhaps

initially for slums and low-income housing, to incentivize faster production of low-income housing,

expedite registration, and make processes more transparent and cheaper.

Urban Land Management

Spatial plans (RTRW and RDTR) and zoning plans need to be developed in line with the resources

required to implement them. It is strongly recommended that the role of spatial planning in

Indonesia be reviewed and replaced with more fl exible policy instruments. A key consideration is

to specify the objectives of spatial planning and present these for public discussion prior to their

being formally approved. Spatial plans should be based on sound assessments of the needs of

key groups, including local communities, especially vulnerable groups such as the urban poor and

women. Although many different policy instruments have been applied in Indonesia before with

mixed success, it is important to acknowledge that any policy instrument will only succeed if it

enjoys strong and sustained high-level political and administrative support. Options could include

the following:

Land Consolidation/Readjustment. This is well-known in Indonesia and is worth undertaking

and expanding as it has been successful worldwide.

Land Sharing. This may be applicable on public land. Legally, landowners have the right to clear

the land from illegal occupants. However, if the fi nances demonstrate that land sharing is more

107 | Annexes

benefi cial than land clearing, it may be effective if the site is large enough. A relaxed FAR can also

provide scope for obtaining landowner agreement.

Requests for Proposals (RFPs). RFPs could bring public, SOE or waqf land into use in ways that

maximize public benefi ts, such as the provision of low-income housing, in a competitive, market-

based manner. An RFP stipulates a number of mandatory requirements that any developer must

meet, together with a number of desirable additional benefi ts. The winning bidder is then able to

commence development.

Planning/Design Briefs. Site development briefs can enable spatial planning agencies to stipulate

the requirements to which any development must conform in order to obtain planning permission.

It is a powerful tool provided that briefs are based on accurate assessments of market prices.

Transfer Development Rights (TDR). TDRs separate the right to develop land from the land itself.

This can provide local governments with innovative solutions to a variety of social and economic

problems. Transfer of Development Rights involve purchasing development rights in areas where

more development is desired. In effect, the owner is being paid to not develop in one location and

to develop somewhere else.

Public/Private Partnerships. The only obstacle to PPPs is the land use right which allows

developers to use government land for 30 years with an extension of 20 years. Developers usually

consider 30 years to be too short to gain profi ts for the large investment on the land development.

However, the approach offers scope for selective application.

Transit-Oriented Development (TOD) and Housing. If transit-oriented development is being

applied by some local governments, then by explicitly including plans for low and middle income

housing in the TOD areas, land which will be higher value in future (because of investment in

transport and other infrastructure) can be acquired or protected for public interest ahead of the

installation of the road and rail networks.

Allocating Public Land for Housing. The fi rst priority is to bring unused and under-utilized public

land into use for low-income housing. BPN should be required to identify all land belonging to

ministries, SOEs and other public entities as well as waqaf land so that negotiations can be

initiated regarding the release of land suitable for housing. This would require the establishment of

an institution that would have the legal mandate and authority to negotiate for land with all these

agencies.

First Refusal on Local Government and SOE Land to be Sold. Consideration could be given

to encouraging local governments and SOEs that want to sell land to offer it as a fi rst option

to a housing authority. This may require the development of clearer land release protocols or

regulations to ensure that the conditions of land release are transparent and that land prices are

fairly set between the agencies involved in each case. This may require legal or regulatory backing.

Housing Plans (RP3KP) to be coordinated and aligned with Municipal Spatial Plans (RTRW) and Detailed Plans (RDTR). Instruction to BKPRD to review existing RTRWs to integrate

RP3KP. Low-income housing zones to be clearly marked in RDTR and relevant plans, and local

governments should implement tools for enforcement of these zoning conditions.

Policies, Programs and Instruments to Improve Land Supply for Housing

In addition to considering the above options, the following additional recommendations are

provided for consideration.


Make full use of un- or under-utilized inner-city land as well as undeveloped peri-urban land. This

can provide areas for relocating inner-city squatter settlements without adversely impacting on

livelihoods for the urban poor who depend upon good access to major commercial centers.

Enforce permit conditions. Do not renew permits easily if development has not started.

BKPRN and BKPRD need to involve MPWH and Dinas Perumahan so that housing plans and

spatial plans can be integrated.

Conversion of agricultural land to urban land should have a proportion reserved for low-income

housing.

Reinstate the social purpose of Perumnas so that it is not required to make a profi t but uses

its market expertise to obtain best value for lower-income groups, using public funds to assist

low-income households obtain affordable land in appropriate locations for housing.

Instead of acquiring extensive areas of privately-owned land for public purposes such as

housing, encourage land-owners to develop land themselves through incentives, such as

further relaxations on FAR, and penalties for non-use, such as increased tax rates for land

(especially for large land-holdings or empty properties) and the repossession of land not

developed within the three year stipulated development period.

Implementation Plan

The following are the immediate, short and medium-term priorities for urban land policy.

Immediate Actions (0-12 months)

Undertake a land needs assessment to ascertain the areas of land needed to meet existing

and projected increases in population and reduce the existing backlog and over-crowding.

This can identify changes that may be required to the current regulatory framework for spatial

planning, such as density levels, locations for priority uses and standards for road reservations

and public open space. It is recommended that the 30 percent standard of urban land for

public open space be lowered to reduce land development costs.

Put all unused or under-used public, SOE (including Perumnas) and waqaf land to more effi cient

social and economic use, including allocations for low income housing. This can achieve

some ‘quick wins’ to generate momentum and build confi dence in addressing more structural

constraints to land supply for affordable housing.

Amend current regulations preventing the provision of basic services into urban settlements of

unclear or illegal tenure status so that basic services can be provided.

Identify informal or squatter settlements that are suitable for in-situ upgrading and regularization

and encourage land sharing or re-blocking to put land to the most effi cient use through the

active participation of local residents.

Make full use of un- or under-utilized inner-city land as well as undeveloped peri-urban land. This

can provide areas for relocating inner city squatter settlements without adversely impacting on

livelihoods for the urban poor who depend upon good access to major commercial centers.

Identify sites within existing urban areas to which environmentally vulnerable informal

settlements can be relocated with minimal disruption to current livelihoods. Encourage the

active participation of the communities in the relocation process.

Tighten the system of re-granting building permits (or land use rights which may lapse after a

period). Recommend that if permits or use rights are granted, they should be used within the

stipulated period. Land held in the new program would be exempt from this.

109 | Annexes

Work with local civil researchers, consultants and civil society organizations to improve

assessments of the needs, resources and priorities of low income groups, since not all low

income households will have the same needs and these change over time.

Short-Term Actions (1-2 years)

Consider fi scal and regulatory options for encouraging land-owners to put unused urban and

peri-urban land into productive use.

Investigate measures to incentivize land to be released for low-income housing, or mixed-

income housing with at least a 50 percent low-income component.

Review procedures for registration, permitting and development of land and introduce ‘One

Stop Shops’ to enable the procedures to be completed quickly and effi ciently.

Revise the legal status of Perumnas so that it is not required to make a profi t.

Identify options for public-private partnerships and the active involvement of civil society

organizations in the provision of land for low-income housing.

Encourage implementation of poli-centric instead of mono-centric urban spatial forms in order

to diversify options for urban development and housing linked to improved transport and

infrastructure.

Explore options for introducing land value capture and betterment levies to generate revenues

and ensure that land is put to the most socially and economically effective use.

Amend Law No.2/2012 to establish a land provisioning agency to acquire land for public

purpose and incorporate land for housing using a range of policy instruments and forms of

land tenure and property rights.

Develop clear norms, standards, procedures and manuals for implementing land consolidation

and any other instruments to obtain land for housing.

Involve the Ministry of Home Affairs to deliver central government policies to the local

governments.

Medium-Term Actions (3-5 years)

Use increased revenues to strengthen local government and build collaboration between

central government agencies, SOEs and civil society organizations (CSOs) active in the housing

sector.

Encourage and improve capacity of local government to carry out several instruments of land

provisioning for housing as stipulated by Law No.1/2011 and Law No.20/2011.

Annex 4.4 Home Improvement and Incremental Expansion


It is estimated that about 70% of the Indonesia’s housing stock is self-built and amongst low-

income households, this share may be close to 100%. Most Indonesians solve their housing

needs by building and improving their homes incrementally, as it is diffi cult for low-income

households to access mortgage fi nance, and most developers concentrate on building units for

higher-income households. This makes government support toward home improvement and

incremental expansion particularly important.


Increasing the affordability of home improvement and incremental house construction should

receive the highest priority as a method of improving the availability of housing and improving the

quality of substandard units for low-income segments of the population. The following section

describes the characteristics of existing GoI support.

Since 2006, GoI has been implementing a subsidy program, known as the BSPS program, aimed

at supporting home improvement and incremental construction. The program has been managed

by the former Ministry of Housing. The key goal of the program is to increase affordability of home

improvement and incremental construction for low-income households, whereby benefi ciaries

receive a subsidy of either IDR 7.5 million for home improvement or IDR 15 million for new

construction.

The program has the following implementation scheme:

GoI selects several regions in each province where the program will be implemented.

The regional government selects the districts for program implementation.

A consulting company, hired by the Ministry, visits the selected district and randomly selects

poor households. By surveying the inhabitants it then selects potential benefi ciaries that meet

certain criteria (e.g. households have monthly income below IDR 1.5 million, own the house,

have legal land title, etc.)

After the list of benefi ciaries is approved, the consultants assist each benefi ciary in preparing

the basic design of the intended home improvement, including the set of required construction

materials and the total cost of the suggested home improvements. The cost of services of

these consultants is approximately IDR 220,000 per benefi ciary.

At the project’s implementation stage, another group of consultants is hired to advise

benefi ciaries on how to select proper construction materials and conduct home improvements.

To ensure targeted use of funds, the money is distributed directly to material suppliers in

two installments, the second of which is paid only after the consultant confi rms that 50% of

works are completed. The cost of services of these activities is approximately IDR 500,000 per

benefi ciary.

The work of the contracted consultants is monitored by a group of 300 controllers, (hired for

6 months each), as well as periodic random inspections that are carried out by staff from the

Ministry. Cost of this oversight is approximately IDR 100,000 per benefi ciary.

Detailed information about each benefi ciary, the type of home improvement made, design,

volume and cost of materials, as well as the total cost of the project, are all documented and

collected by MPWH.

The BSPS grant covers only part of the total cost of a project implemented by a benefi ciary.

The rest is covered by the benefi ciaries’ savings or is borrowed by the benefi ciary from various

sources, including family, community groups, or local money-lenders. An average total cost of one

housing project (part of which is fi nanced by the BSPS subsidy) is estimated to be approximately

IDR 20 million.

In total, GoI spends about IDR 1 million in overhead costs (management, supervision, control,

assistance, etc.) to distribute one subsidy of IDR 7.5 million or IDR 15 million. Such large

expenditure per grant is due to direct fulfi llment of all support functions by the central Ministry.

The BSPS program receives only limited government funding each year, receiving IDR 1.5 trillion

and IDR 2.1 trillion in 2014 and 2013 respectively. In comparison, disbursement of government

111 | Annexes

funds toward the subsidized mortgage program (FLPP), which assists households to purchase

developer-built housing stock, has ranged from IDR 3.7 – 5.4 trillion per year in the past 4 years,

as shown by Figure 11.

Figure 11. Government Budget Allocation to BSPS and FLPP Housing Programs

6,000,000

5,000,000

4,000,000

3,000,000

2,000,000

1,000,000

0

Bud

get,

milli

on ID

R

2011 2012 2013 2014

FLPP

BSPS

Source: Ministry of Finance, 2014.

Overall, the program has the following positive characteristics:

Careful attention is paid to ensure that the subsidy reaches the target groups – low-income

people with poor housing conditions, minimizing the risks of corruption and nepotism in the

selection of benefi ciaries.

The BSPS program effectively controls for the appropriate use of funds, i.e. there is accountability

to ensure that grants provided under the program are used exclusively for home improvements

and home extensions by poor people.

The BSPS program increases affordability through the reduction of the following elements

of home improvements/incremental construction projects: (a) fi nancing costs are reduced

through provision of subsidy; (b) engineering costs are reduced through the provision of free

advice on selection of materials, preparing bills of quantities, etc. as well as at implementation

of the project; (c) labor costs are reduced through free advice on how to conduct works on a

do-it-yourself basis.

However, there are the following issues related to the design of the BSPS program:

High overhead expenses as most of the services are provided with the assistance of a large

number of consultants, hired by the MPWH.

Very low coverage. According to MPWH’s records, the BSPS program annually covers about

140,000 households, which is about 1% of the number of Indonesian households that are

estimated to live in substandard housing.

No measures address the cost of construction materials, which could be a means to improve

affordability of home improvements and incremental construction.

The program is stand-alone without links with other national or regional initiatives aimed at

improving housing conditions, such as slum-upgrading. Improving linkages to other programs

could help to enhance the effectiveness and impact of the home improvement subsidy.


There is no support to leverage the private sector participation, either through affordable

housing microfi nance or links to stimulate the local building industry.

The subsidy does not use an integrated targeting system for identifi cation and verifi cation of

benefi ciary households.


As it reaches only a fraction of those households living in substandard units, and these households

tend to be in rural areas, the existing program has a minimal effect on Indonesia’s overall housing

situation, particularly in terms of new high-demand areas in urban centers. This Roadmap

recommends to substantially scale the BSPS program in order to provide the home improvement

subsidy to a much larger number of households and refocus subsidy provision to priority areas,

such as slums and low-income urban communities.

Yet, the current delivery systems are ineffi cient. The total budget allocated to the program from

2010 to 2013 was approximately IDR 3.86 Trillion for 543,925 benefi ciaries (as reported by

MPWH). Overhead costs (supervision, management, control, technical assistance to benefi ciaries,

etc.) that were associated with providing the BSPS subsidy were estimated to be about IDR 544

Billion. Hence, it is recommended to redesign the program to streamline delivery of the subsidy,

and then to increase the budget allocation. These recommendations are elaborated in the rest of

this section.

1. Strengthen the Design and Delivery of the Existing Home Improvement Subsidy

The current subsidy program ccould be redesigned and complemented in the following ways.

Identifi cation and Eligibility. Complement the existing benefi ciary identifi cation system with the

utilization of the Unifi ed Database (BDT) for social protection programs operated by the National

Team for Poverty Alleviation Acceleration (TNP2K), which can act as an effective tool for controlling

selection of fi nal benefi ciaries.

Currently, only a very small number of people that could benefi t from home improvement subsidies

are addressed by the program. A waiting list is not created and the benefi ciaries are selected

through a kind of a lottery. Every year a new set of regions is selected for program implementation.

In each region, one district is selected. Specially hired consultants visit the district, choose the

poorest looking houses and suggest a subsidy. If the selected candidates legally own their houses

and if the local administration confi rms that their informal income is below IDR 1.5 per month,

they are approved for participation. This mechanism is very costly (due to the use of consultants),

and not very reliable (because local administrations cannot accurately or systematically assess

informal incomes).

Utilization of the Unifi ed Targeting Database will allow local governments to simplify and reduce

costs of the selection of benefi ciaries.

Budget Allocation and Subsidy. The Roadmap recommends signifi cantly increasing the budget

allocated to the program, once the delivery systems have been strengthened, so that the subsidy

can be expanded to reach more low-income households. The amount of the subsidy could also

be reviewed, so that it is adjusted by geography (i.e. by province and by rural/peri-urban/urban/

metro). MPWH could even consider moving towards a progressive subsidy system for the BSPS

program across income segments and housing options, whereby lower-income households

receive more assistance.

113 | Annexes

Delivery System. It is recommended to improve the design of the subsidy and signifi cantly reduce

overhead expenses through:

(a) Shifting toward a local government-led implementation model where local governments take

a lead role in identifying and verifying benefi ciary households, administering the delivery of the

subsidy and implementation of the program, as well as monitoring and evaluation. This will

allow the local government to bundle the subsidy with other initiatives and local priorities, such

as upgrading or provision of services to specifi c locations.

(b) Standardize the system for the provision of engineering advice so that it is scalable. Currently

benefi ciaries conducting home improvements and home extensions are supported by direct,

personalized advice. This work is implemented by several teams of experts (mostly engineers)

paid by the government. It is recommended to change the approach of support to benefi ciaries

to utilize pre-developed tools in order to provide advice in a standardized and cost effi cient

manner. The tools should be prepared for types of home improvements that are conducted

most often (informed by the home improvement data accumulated through the BSPS program).

They should also take into account regional variations in construction techniques. Examples

of tools include: (i) software calculators to prepare construction cost estimates for each home

improvement or extension; and (ii) detailed description of technological procedures necessary

for non-professionals to do the job (for example, using pictures).

c. Facilitate the crowding-in of housing microfi nance by connecting households to fi nancial

institutions offering housing microfi nacne, assisting with household fi nancial education and

underwriting. This recommendation requires more generalized support to the development of

the housing microfi nance sector as well.

d. Titling of benefi ciaries. Address bottlenecks to ensure that there is title regularization of informal

homes participating in the program. At present, BPN only has a small budget for registering

around 7,000 land titles per year. The Roadmap recommends increasing the budget so that it

covers all informal houses under the BSPS program. This, along with the tools for helping local

governments regularize land tenure (described in detail in Action 6 of this Roadmap) would

help reduce these titling bottlenecks.

Improved Targeting and Accountability. Complement the rural program with new programs

with strategic targeting characteristics, such as (a) densely populated urban clusters of slum/

squatter/starter core households in order to utilize economies of agglomeration and scale; (b)

lower and middle-income households willing to expand their homes in order to create additional

units at a low cost.

Communities could also be used more effectively to help deliver construction and fi nance

assistance. Currently, subsidies are administered in a group, but the potential for collective action

of the group is not well harnessed.

Implementing agencies may also consider output-based delivery systems to improve the

accountability of the use of funds and promote collaborative implementation that could improve

the effi ciency of the program.

Currently, a few measures for collaboration and collective action exist. Each household receives

the subsidy in their bank account, which cannot be withdrawn. Then, the households collectively

pursue market research with material shops and decide which material to buy, in bulk. Once the

material is ordered the money is transferred from the individual accounts to the material vendor(s).

In rural areas the households may collaborate to construct the houses during off-work seasons.

In urban areas, the households could hire construction labor together to minimize the costs of the

works.


Alternatively, a model could be introduced so that households are required to collaborate more

closely. For example, a parallel scheme delivered by the West Jakarta Provincial Government

follows output-based principles: it releases 60% of the total subsidy, suffi cient to construct, for

example, 6 out of 10 houses. Only when the 6 houses are completed does the group receive the

remaining 40% of the funds in order to construct the remaining 4 houses.

2. Link Home Improvement Subsidy to Other Public Housing Programs

Ensure coordination between the home improvement program and other public housing programs,

in particular, slum upgrading and delivery of incrementally expandable core housing.

Home improvement and extension can substantially increase the effect of slum upgrading initiatives

helping poor communities to further improve their homes that benefi t from tenure regularization

and improved access to infrastructure and social services.

3. Promote Home Expansion Amongst Middle-Class Households

A program can be explored that supports incremental expansions of existing homes so that

they become multi-family units. This would help to reduce urbanization pressures as it would (a)

reduce existing overcrowding and (b) prevent future overcrowding by catering to new household

formation.

Program parameters that could be considered include: (i) linkages to the housing mortgage or

microfi nance program, depending on borrower and collateral characteristics; (ii) a subsidy may

be considered (that should not exceed the amount of the home improvement subsidy to low-

income households); (iii) technical construction support, similar to the assistance which is used in

other home improvement programs. This construction support could be provided via professional

networks with trainings and practitioner guidelines for home expansion and then linking middle-

class households with those architectural and engineering consultants that are deemed qualifi ed.

4. Support the Development Of Local And Regional Building Industries

Explore measures to support development of local building industries, with the following objectives:

(i) to increase production of and availability of more affordable good-quality construction materials;

(ii) to stimulate local business development and job creation for artisans and builders in the

construction sector; (iii) improve environmental sustainability and maintain cultural preferences

through use of local building materials and construction techniques.

Strategies to be explored include: (i) labor-intensive construction technologies for core houses; (ii)

training of microenterprises and artisans in construction techniques for quality home improvements

and expansions; (iii) standardization of local/regional building material manufacturing; (iv) reduction

of trade barriers and costs to improve availability of affordable and quality construction materials;

(v) technical assistance to home-owners to reduce costs and ensure compliance with construction

standards for adequacy and safety; (vi) adaptation of regulations and policy to concentrate on

realistic and fl exible minimum standards.

5. Support Development of and Crowding in of Housing Microfi nance Sector

Support the development of the housing microfi nance sector to provide improved options for

households who want to make higher-value improvements or incrementally expand their homes,

115 | Annexes

over time. A housing microfi nance program may also help to expand low-income households’

access to the fi nancial sector. International examples are the Patrimonio Hoy program implemented

by Cemex in Mexico and SEWA in India. Lafarge and Holcim are building such programs in

Indonesia already.

Currently HMF lending is not very developed in Indonesia, though there is anecdotal evidence

that a substantial portion of microloans are used for home improvement purposes. Development

of the HMF industry may require fi nancial and technical assistance to be channeled to fi nancial

institutions to support them to develop HMF products. HMF is unique as it requires a combination

of fi nancial lending services and non-fi nancial services in order to address the specifi c risks of

home construction. This requires training of loan offi cers or partnerships with building materials

providers to assess home improvement projects, prepare cost estimates for materials, and monitor

quality of construction.

This Roadmap recommends the government consider supporting incubation of HMF product

development with several pilot fi nancial institutions in different regions of the country. This support

could be provided via an NGO contracted by government, regional banks, or via a state-owned

enterprise, such as SMF. Technical support should include systems for consumer education and

eligibility, training of loan offi cers, HMF product design, IT systems etc. Based on the results, the

capacity building program can be fi ne-tuned and scaled all over the country, provided for a fee, as

demanded by fi nancial institutions.

To make housing microfi nance more accessible, borrowers may need further assistance, for

example, in the form of a down-payment (to avoid the compounding of interest) or through

matching payments (as a behavioral incentive).

In the short-term, the government can use the existing programs (such as KUD, used to support

fi nancial institutions) to deliver support for HMF lending. In the medium-term, the government might

consider initiating a special state-enabled revolving fund that would provide liquidity to fi nancial

institutions for HMF at rates equal to the costs of funds to the government. This revolving fund

may be linked to the long-term liquidity provided through the reformed FLPP program, enabling a

certain level of integration across housing fi nance and housing microfi nance and a better level of

fi nancial integration for low-income households.

Implementation Plan

Immediate Actions (0-12 months)

Detailed design of the reformulated BSPS program.

Assess feasibility of integrating program to focus on spatial clusters of poor communities in

slums or other low-income urban areas.

Explore types of support toward a new program (or program pillar) for expansion of lower-

middle class homes.


Implement program reforms, including the local government delivery systems and use of the

Unifi ed Targeting Database, and then scale home improvement subsidy program to respond

to demand.

Build up systems and capacity to execute and integrate subsidy with slum upgrading and new

green-fi eld incremental development.


Develop TA channels and access to fi nance to support fi nancial institutions in housing

microfi nance development.


Fine-tune and scale all programs nation-wide to respond to home improvement and incremental

housing needs.

Focus on executing the strategy for housing microfi nance sector development.

Annex 4.5 Public Housing Policy


The bottom 40 percent of Indonesian households cannot afford formal market-rate housing

solutions. The only housing options available to these households are to either produce

incrementally on a self-help basis or rely on highly subsidized public housing provision. Self-built

housing constitutes the majority of new housing construction in Indonesia. While support for

low-income households to build incrementally is a critical part of the proposed policy mix in this

Roadmap, the government will also need to reformulate public housing policy and expand public

housing production in order to effectively address the housing defi cit. A robust and diversifi ed

system of public housing production will be necessary to respond to different characteristics of

household and regional demand.

Indonesia currently has two central government programs that subsidize “public” housing

supply53. The Rusunami Program supports resident-owned vertical housing and the Rusunawa Program results in publicly-owned vertical rental housing. The following section summarizes the

key fi ndings from an assessment of each program as well as a summary of public housing policy

recommendations.

The largest housing need in Indonesia currently is for new low-cost units in urban areas. Not

addressing this need inevitably results in new slum formation for lower-income households and in

over-crowding of middle-income households.

Rusunami (Vertically-Confi gured, Resident-Owned Housing)

Overview

The Rusunami program can be characterized as a hybrid subsidy. On one hand, it is a very light

supply-side subsidy, which on its own would have no ability to drive construction of new units by

the private sector. It is also a light demand-side subsidy, also insuffi cient to act as a sole driver of

affordability or access to low-income buyers.

53 “Public housing” is used to refer to both Rusunawa (vertically-confi gured public rental housing) and Rusunami (vertically-confi gured ownership housing) even though Rusunami is not developed, owned or managed by the public sector.

117 | Annexes

In combination with the substantial demand-side mortgage subsidy, known as FLPP, and the

mandate to produce affordable units54, it is the least powerful part of a bundle of incentives for

affordable rusun55 ownership.

However, construction and land price increases in recent years have stalled the Rusunami

program’s usage. A price cap increase on houses eligible for FLPP mortgages is pending. This

may revive construction, but without other changes, it is likely that the households benefi ting from

the program will migrate up the income pyramid and cost the government more in foregone tax

revenues.

Detailed Program Review and Analysis

The Rusunami program is meant to encourage production by the private sector and by Perumnas

of owner-occupied units in a low-, mid- or high-rise confi guration. Tax incentives are available to

both buyers earning less than IDR 7 million per month and to developers for units below the sale

price limits.

The tax benefi t to buyers is a break from VAT tax (PPN), which is typically 10% of the “costs of

production”. These costs of production include construction materials and labor, but not land and

sales costs. Eligible costs are estimated to constitute between 85% and 90% of total development

costs (TDC). For example, the value of the tax benefi t to the buyer for a housing project that was

built in 2014, where TDC was IDR 216 million, would be about IDR 18.4 million (assuming 85%

TDC would have otherwise been subject to VAT). This is about 13% of the sales price that was

offered to the target market.

The tax break offered to developers is a reduction in the transfer tax that they owe upon conveyance

to the end buyer. For qualifying affordable Rusunami units, developers are charged only 1% transfer

tax on the sales price of the unit, instead of the standard 5%. For the same project example cited

above, the savings were calculated to be around IDR 13 million per unit, or 6% of TDC. This

subsidy does not begin to make up for the differential between the market value of units and the

sales price cap imposed by the Rusunami program. In the example, this differential was about

IDR 260 million (65% of the market value), thus illustrating the relative impotency of the subsidy.

Units receiving Rusunami tax benefi ts are often fi nanced by the buyers through the FLPP mortgage

program. This program has the same income restrictions for borrowers and offers a subsidized

interest rate. Developers recognize the mortgage subsidy program as a demand-side booster and

as the main driver of developer behavior in the ownership market, which helps them to sell units

that they are required to build under the rule for developing 20% of units as affordable.

In order to qualify for Rusunami tax breaks, the units must currently be sold at prices below

a target level of IDR 144 million (specifi ed in Law No. 31/ 2007). However, total development

costs have increased signifi cantly since the time that these limits were established, with some

estimations indicating that hard construction costs may have increased fi ve fold in that time.

Recently, in the interest of spurring production of housing for middle-income households, there

has been a proposed increase in the maximum sales price to IDR 315 million. If this increase is

54 20% of fl oor area of new developments in Rusun (vertical developments) must be in affordable apartments for purchase or rental.

55 Rusun is the Bahasa Indonesia term for vertically confi gured housing, regardless of tenure. English terms of apartments, fl ats or multifamily units are equivalents.


enacted without other measures, this will mean that units previously affordable to households with

monthly incomes just over IDR 4 million will now only be affordable to households with monthly

incomes at nearly IDR 8 million.

These tax and mortgage incentives are determined based on sales prices, not actual household

need. If house prices increase, the government is obligated to forego more revenue without the

ability to control the amount of the subsidy or to direct it towards certain benefi ciaries. These

incentives are also regressive, as higher price points will trigger more subsidy and will benefi t

higher-income families, who will be able to support larger mortgages and higher down payments.

Additionally, since these tax incentives are available on an open-pipeline and on a self-claim

system, they are diffi cult to direct, size and monitor. Only after the fact does the government

understand the amount of resources that it has utilized in foregone tax revenue. There is no real-

time tracking of these subsidies nor any reporting to MPWH, which makes program evaluation

and fi scal controls diffi cult.

Table 13. Rusunami Program Quick Facts

CURRENT PROPOSED

Target housing product Rusuna (Apartments)

Sales price limits Currently Rp 144 million Proposal pending to raise limit to Rp 315

Target population Formal workers with monthly incomes < Rp 7 million

Tenure Rasun Apartment Ownership

Developers Private and Perumnas (SOE)

Incentives offered by government

To developers: 1% transfer tax, which is discounted from the typcial 5% of

sales price of the unit.

To buyers: No VAT (PPN), which is typically 10% of costs of productions and

due upon purchase of the unit.

Cash value of subsidy per unit (based on example)

VAT Rp 18.4 million

Transfer Tax Rp 5.6 million

TOTAL Rp 24,0 million

VAT Rp 18.4 million

Transfer Tax Rp 12.6 million

TOTAL Rp 31.0 million

Subsidy in 2013 reported by MoH

No data.

Units produced in 2013 reported by MoH

Not able to attain data.

Rusunawa (Multi-Family Public Rental Housing)

Overview

Government entities at various levels are the funders, developers and owners of the housing

stock of the current Rusunawa program. Private sector actors are engaged on a contract

basis by government entities to perform certain functions during the development process and

in operations. However, they do not provide fi nancing and do not assume risk, nor long-term

responsibility.

Detailed Program Review and Analysis

The current Rusunawa program is a multifamily public housing production program driven by the

central government, with long-term ownership placed in the hands of local units of government.

Each year, the central government allocates capital subsidy and administrative budget for public

rental housing programs, which was previously divided between Ministry of Housing (Kemenpera)

119 | Annexes

and Ministry of Public Works (DJCK). Generally speaking, DJCK is charged with construction

of units where trunk infrastructure is also required. Kemenpera generally constructed on sites

that were already serviced, although a local government could also be involved in infrastructure

provision.

Since 2011, Kemenpera received the majority of the government funds allocated to public rental

housing (60%), and was expected to produce roughly 76% of units. In 2014, Kemenpera allocated

IDR 1.3 trillion to the public rental program, which made up 33.2% of Ministry of Housing’s program

budget, while the Ministry of Public Works allocated IDR 1.1 trillion to public rental housing, which

was 1.5% of the total budget.

Comparisons between budget allocations and the number of units that were planned show that

the housing construction costs of the DJCK-produced units is signifi cantly higher, almost double

that of Ministry of Housing units. This apparent cost differential is only partially explained by the

provision of infrastructure by DJCK.

The budget allocations to the Ministries for the public rental programs do not come with nuanced

goals such as geographic distribution or project characteristics, instead there are only 7 minimal

threshold criteria.56 Even with few dictates for expenditure, it is challenging for Ministries to utilize

their full funding allocation. This is because the local units of government, who are the long-term

owners of the projects that result from the program, may not fi nd the proposition of a Rusunawa

project appealing and often struggle to identify suitable sites for the rental housing.

In construction, the Ministries act as developers for the Rusunawa projects by acquiring the sites

from local units of government, hiring a private fi rm to design, and construct the project on a fee-

for-service basis and hiring a private fi rm to monitor the construction of the project. In light of this

tendency to contract out the vast majority of the day-to-day responsibilities, the Ministries are not

readily exposed to the actual practice of real estate development.

Local governments supply the land for the public rental housing projects, approve land use, issue

permits and own and operate the project after construction completion. This includes taking on

the role of managing any operating defi cits and capital needs, which exceed the rent revenues

generated by the projects. Local governments are also charged with property management, which

is largely accomplished through site managers and vendors who are supervised by representatives

of local units of government.

The following characteristics of the program are problematic:

Total development cost of projects is not tracked. No single source of information exists

regarding the total development cost covered by both central and local governments, nor the

market value of the land contributed by local governments.

Operating costs are not reported or monitored. The absence of this information creates

challenges for meaningful long-term program planning and evaluation.

Tenant income eligibility is set by provincial minimum wage (UMP) not local minimum wage

(UMK), with a nation-wide limit of IDR 2.5 million per month, which equates roughly to Decile 6

households.

Rents are set at 30% of UMP, not set to actual household affordability, which may be problematic

for the lowest-income Indonesians (particularly those in Decile 1-4).

56 i.e. Compliance with local plans, serviced by water and sewer, not in risk zone, etc.


Table 14. Rusunawa Program Quick Facts 57 58 59 60

Target housing product Rusuna (Flats)

Development cost limits None

Budget allocations 2011 2012 2013 2014 2015 budget

Ministry of Housing(Kemenpera)

57

Total Rp 1.075

trillion

Rp 1.156

trillion

Rp 1.370

trillon

Rp 1.328

trillion

Rp 1.492

trillion

Per Unit58 Rp.

25,058,275

Rp.

22,416,910

Rp.

26,868,471

Rp.

44,254,153

Rp.

41,113,829

Production Assumptions

42,900 51,600 51,000 30,000 36,300

Rusunawa as % of ministry budget

31% 19% 28% 33% 32%

Ministry of Public Works (DJCK)59

Total Rp .853

trillion

Rp .649

trillion

Rp .823

trillion

Rp 1.099

trillion

Rp .770

trillion

Per Unit60 Rp.

40,648,062

Rp.

54,158,494

Rp.

40,978,628

Rp.

130,854,688

Rp.

116,666,667

Production Assumptions

21,000 12,000 20,100 8,400 6,60

Rusunawa as % of ministry budget

1% 1% 1% 1% 1%

Target population General low-income population and special target groups (which are

largely slum or disaster relocation)

Income eligibility Up to Rp. 2,500,000 monthly income as nation-wide cap, adjusted by

each local government, but not to exceed 1 UMP.

Tenure supported Rental (three year lease terms with one extension allowed)

Developers Central Government Ministries (Ministry of Public Works and Housing)

Incentives / subsidies offered by central government

Full (100%) subsidy for construction cost of the project and limited

administration and project management costs.

Subsidies offered by local government

Contribution of land, obligation to pay operating defi cits and any capital

needs not covered by net rental income.

Rents 30% of the Provincial Minimum Wage (UMP), with rents not to exceed

prorated share of operating costs.

Affordability Not calculated on an actual household basis, so households could pay

a very high or low percentage of their income for rent.

57 Includes housing unit construction, administration and supervision, but not land or other costs borne by the local government.

58 Per unit imputed from budget fi gures provided by MoH, assuming 300 units per twin block

59 Includes housing unit construction, trunk infrastructure provision, administration and supervision, but not land or other costs borne by the local government.

60 Per unit imputed from budget fi gures provided by MoH, assuming 300 units per twin block

121 | Annexes


1. Revitalize Perumnas’ Role as Master Developer in Public Housing Production

A core recommendation of the Roadmap is to revitalize and renew the mandate of Perumnas to

act as the Government of Indonesia’s master developer for public housing production. GoI would

provide Perumnas with the mandate to lead bulk housing development on newly released land.

As outlined in Policy Action 6, GoI will develop a land inventory and utilization program to identify

and mobilize under-utilized or vacant public land assets. Land to be released or assembled under

this program is currently under the oversight of SOEs, LGs, BPN (abandoned land), waqaf, and

various line ministries. At a strategic level, Perumnas’ experience in land acquisition, aggregation,

development and management should be leveraged by the land assembly entity responsible for

executing the program.

In conjunction, Perumnas would be revitalized to act as a publicly-owned private institution

that serves as the lead developer, developer joint-venture partner, or lessee of land under the

strategically released land portfolio.

In this role, Perumnas will be able to support local governments with the delivery of housing

for sale, long-term leasehold options, as well as for rental (whereby local governments act as

landlord), with features similar to Turkey’s TOKI or Morocco’s Al Omrane initiatives. High performing

local governments could utilize Perumnas as co-developers, whereas Perumnas could take a

lead on development partnerships with lower capacity local governments, which will in turn gain

knowledge through project experience.

Specifi c activities of Perumnas may include taking a lead on site master-plans for projects,

incorporating principles of mixed-use and mixed-income zoning for sustainable settlement

planning, structuring development plans and fi nancing strategies, facilitating release of land to

private sector developers (structuring the RFQ and RFP processes and taking on non-commercial

risk), coordinating potential development guarantees, trunk infrastructure delivery, arranging sales

agreements or off-plan escrows and acting as landlords for lease-to-own housing.

For this strategy to be successful, a business plan will need to be developed for revitalizing the

role of Perumnas, clearly defi ning the needs for institutional strengthening, structuring of the

legal and fi nancial relationships with central and local government entities, and the framework for

engagement of private sector.

2. Introduce Starter Core Units as a Housing Solution

On central or well-connected peripheral areas, as well as select inner-city sites that require

densifi cation, incrementally expandable core units or row housing could be a viable solution. The

Roadmap recommends developing and introducing a program for subsidized basic core starter

units or row houses that are incrementally expandable and target lower-income and vulnerable

households. These units can be delivered alone or in combination with other forms of public

or market-rate housing to promote a mix of uses, incomes and housing typologies. Housing in

new settlements can also be combined with space for non-residential uses for local employment

generation (e.g. non-hazardous manufacturing and commercial).

Incrementally expandable starter core units enable affordable and decent housing careers with

two key advantages:


1. Moving vulnerable and poor households quickly out of unacceptable housing conditions and

into basic starter cores, thereby achieving public health and humanitarian objectives quickly.

2. Supporting a swadaya platform for improvement and expansion towards continued home

improvement.

This platform may have characteristics of self-help, but it should not be confused with self-

construction per se. In urban areas, many households may prefer to hire labor, rather than self-

construct. Here, self-help implies self-management and self-determined decision making while

the sourcing of construction services constitutes an opportunity for crowding-in of private sector

construction.

There are two main types of projects that could be prepared:

Short-term small-scale projects: Primarily on centrally-located and smaller sites, where core

units or row housing is used for densifi cation, redevelopment and infi ll development

Large-scale settlements: Comprehensive human settlement development (likely on peripheral

land), which requires land assembly, trunk infrastructure, and housing delivery. These projects can

integrate planning for non-residential areas and different typologies of housing to promote mixed-

use and mixed-income neighborhoods.

New settlements may be developed according to a comprehensive approach similar to Tridaya

(i.e. the balance of housing, social and economic development) that was implemented in the

1990s with support of BTN’s Triguna Credit scheme.

Starter core units for the lowest income groups might include the following characteristics:

i. Dwelling Unit. Minimum-size unit (e.g. 10 square meters only, using kampung units as a

benchmark for the start that can then be expanded and improved). The core unit is ready to

move in with basic fi nishings (possibly no plaster, paint, tiles). Various typologies are possible,

including landed row housing or landed maisonette shells on narrow and deep individual lots,

as well as stacked core units to allow for multi-family housing in denser areas.

ii. Site Selection. Units should be built at accessible locations, with good connections to

employment and social services such as schools and health facilities.

iii. Infrastructure. Shared water and sanitation (to improve affordability, reduce project

management costs, and reduce demand from higher-income households); individual electricity

connections to boost the productivity of home-based businesses; basic street surfacing and

storm water drainage (e.g. compacted subgrade that can later be upgraded with paving,

natural storm water run off due to inclination that can later be upgraded with covered drains.)

iv. Land use. Effi cient land use with small alleys, maximizing the number of units with ground-

fl oor access for commercial opportunities, waiving of minimum plot sizes and all minimum

parking requirements.

v. Collective tenure. Support collective construction, management and fi nance with collective

tenure options. This can also help to control entries and exits to reduce gentrifi cation and

improve subsidy control.

vi. Finance. A homeowner’s association collectively possessing land and housing would allow

using member certifi cates as collateral. Incremental home expansion or improvement can

be supported by community funds or through the development of the housing microfi nance

sector.

123 | Annexes

vii. Eligibility/Targeting. The program can target households living in slum areas that are relocated

or redeveloped, as well as the bottom 40% of families living in substandard conditions, as

identifi ed by TNP2K. Self-targeting can also be employed, as most characteristics of the

program will be unattractive to middle-income households.

viii. Delivery. Local governments take a lead in identifying and preparing projects. In the short

term, Perumnas or another private developer can support the development of core housing

projects, particularly on large sites. However, local government can also enlist small-scale

contractors to stimulate the local construction sector or transfer subsidy to higher-capacity

communities so that they can self-manage construction. Technical assistance for project

development will need to be provided at the local government and community level.

ix. Complementary actors. Linkages with CSR, PSO, community organizations and similar

groups may help to speed up the incremental process through additional fi nancial resources

and/or technical assistance.

The following table illustrates some examples of targets that could be developed over the next 5

years.

Table 15. Example of Delivery Targets for a Core Starter Home Program

Phase Cities Year 1-2 Year 3 Year 4 Year 5

1 15 10,000 units 50,000 units 150,000 units 300,000 units

2 +25 — 10,000 units 50,000 units 150,000 units

3 +50 — — 20,000 units 100,000 units

4 +100 — — — 50,000 units

Total +190 10,000 units 60,000 units 220,000 units 600,000 units

3. Reformulate Public Sector Support to Multi-Family Rental Housing

The Rusunawa program for public rental housing can be reengineered to increase production

levels and to improve the quality and sustainability of the apartments produces while continuing to

serve low-income populations. The new Rusunawa program (Rusunawa 2.0) should be developed

to increase the level of local government control to align with decentralization goals.

The current Rusunawa program is implemented primarily by the central government, via the

Ministry of Public Works and Housing, who provide deep capital subsidies and act as a developer,

procuring contractors for both construction and monitoring.

Local governments are expected to provide land and in some cases infrastructure for these projects.

Once the projects are complete they are turned over to local governments for ownership and

operation. However, local governments can be reluctant to participate due to: a) land availability;

b) management responsibility, c) operating defi cit obligations and d) capital improvement needs.

The reformulated public rental housing program will seek to address these shortcomings, with the

Rusunawa 2.0 program taking on the following characteristics:

Rusunawa 2.0 Benefi ciaries and Affordability. The new Rusunawa program would provide

subsidies to projects where all or a portion of the units will house qualifying benefi ciaries. Capital

funding will be made available to build units for target populations who have been displaced by

redevelopment activity in the local jurisdiction as a fi rst order priority. Other Rusunawa residents

may include newly formed households in the jurisdiction or those relocated from other areas.


Maximum allowable benefi ciary income should be set annually and each household should be

provided with a set-term multi-year lease (e.g. 3 years) with options to extend, to provide a certain

level of security. The program could use local minimum wages to correspond to the lesser of local

minimum wage or to households that rank in the lower 4 deciles nationally and adjust rent levels

based on income. In addition, renters could receive greater access to other government supports

(insurance, savings schemes, and services), which would build their household capacity to save

for an ultimate move to ownership housing.

Roles and Capacity Building under Rusunawa 2.0. Authorities, responsibilities and resources

will be pushed to the local level of government where there is existing capacity, allowing the central

government to focus on policy and strategy. Where local capacity is limited, fi nancial and training

resources will be made available to increase the ability of local governments to participate in the

provision of rental housing. Interim delivery methods will be established in the short and medium-

term, calling upon the capacity of Perumnas to fi ll in the gaps. Roles under Rusunawa 2.0 include:

1. Central Government can be charged with sizing production goals, budget allocation,

planning and implementation support, as well as monitoring and evaluation.

2. Provincial Government takes on the role of advisory and consultation on policy and program

development, support to local governments, as well as collecting the inputs for monitoring

and evaluation.

3. Local Government, depending on capacity, will propose projects, accept funding from

MPWH and act as developer and owner or may prepare joint venture partnerships with

Perumnas or a private developer of their choosing, which also meets MPWH approval. Local

governments who are deemed to have insuffi cient capacity can also nominate projects for

funding by MPWH for development and ownership led by Perumnas. These governments will

also be the recipients of capacity building funds from MPWH, and may be directly supported

by a real estate development specialist within the local government.

4. Perumnas. The State Owned Enterprise (SOE) Perumnas will act as lead developer for

Rusunawa projects for low capacity local governments and will also be a potential (but not

mandatory) partner to capable local governments. Perumnas will bring to these partnerships

considerable structuring, design, construction and management capacity.

Allocation and types of funding under Rusunawa 2.0. The new version of Rusunawa will

recognize the real challenges of building long-term quality housing for low-income segments.

By providing a more comprehensive suite of funding types, the program will seek to attract the

participation of local governments (and SOE and private developers) who are currently hesitant

to participate because of the considerable long-term fi nancial burden that they assume. Types of

funding may include:

1. Administration. Funds to support central and local government administration of the

program.

2. Capacity Building. Funds to build competencies of central and local government where they

are lacking and support local facilitators and program consultants.

3. Capital. Funds for the construction of the housing units and necessary infrastructure.

4. Operating. Funds to offset the difference between tenant rent payment capacity and the

costs of operating maintenance and replacement.

Allocations will be made according to MPWH-decided parameters and will favor growing markets

with demonstrated need.

125 | Annexes

To boost immediate production levels, qualifying local governments and their development

partners, including Perumnas, should be able to make applications to the MPWH on a fi rst-

come, fi rst-served basis for funding of all types (Administrative, Capacity Building, Capital and

Operating). Later, a transparent and competitive system for funding allocation may be developed.

Low capacity local governments may nominate projects in their jurisdiction and receive funding

directly for capacity building, while Capital and Operating Funding would fl ow through Perumnas

for those projects.

Table 16. Summary of the Redesign of the Public Rental Housing ProgramRusunawa 1.0(Current State)

Rusunawa 2.0(Short Term)

Rusunawa 3.0(Longer Term)

Developers Central government

(MoH, MoPW)

Qualifying (high-capacity) local

governments, potentially in

partnership in with SOE & private

sector developers

Perumnas on behalf of non-

qualifying local governments

Qualifying local governments,

Perumnas and private sector

developers

Owners Local governments Qualifying local governments,


developers

Qualifying local governments,


developers

Administrative funds

To MoH, MoPW To MoPW/PH, and to qualifying

local governments

To MoPW/PH, and to qualifying local

governments

Capacity building funds

To MoH To central government ministry,

and non-qualifying local

governments

To central government ministry, and

non-qualifying local governments

Capital subsidies

To MoH and MoPW for

construction

To qualifying local governments

via MoPW/PH through a

transparent fi rst-come, fi rst

served fund allocation process

To qualifying local governments,

SOEs and private sector via central

government ministry through a

transparent and competitive fund

allocation process

Operating subsidies

From local

governments to

project

From central government to

local government according to

project need

From central government to local

government, SOE and private sector

according to project need

Long-term stewardship

Little focus and no

funding

Focus on property and asset

management. Require operating

budget and capital improvement

projections before funding

Focus on property and asset

management. Require operating

budget and capital improvement

projections before funding

Eligible residents

General population,

those relocated for

slum upgrading. Up

to Rp. 2.5 m monthly

income, but not to

exceed UMP.

Those relocated for slum

upgrading, and general

population. Incomes up to Rp.

1.7m mo., (corresponding to

D3 and fi rst three categories of

MBR).

Those relocated for slum upgrading,

and general population. Incomes

up to Rp. 1.7m mo., (corresponding

to D3 and fi rst three categories of

MBR).

Rents 30% of UMP 30% of UMK maximum 30% of actual family income, with

lower income targeting favored

in competitive funding allocation

system

Rent increases Rent increases are

sometime prohibited

by old voucher system

and / or not enacted

due to political

pressure

Rent increase would be

automatic, explicit in the lease

agreement between owner and

tenant

Rent increase would be automatic,

explicit in the lease agreement

between owner and tenant


4. Require and Support Good Asset and Property Management Practices

Housing production programs in Indonesia place little attention on the long-term stewardship

of the units produced. The current Rusunawa program turns units over to ownership to local

governments with limited analysis of the ongoing operating budget (surplus or defi cit).

In the interest of protecting the public investment and ensuring that housing is of a decent quality,

steps can be taken to ensure that all properties developed with public resources are well-managed

and that the physical structures serve the longest possible useful life.

This is particularly important in a multi-family confi guration where systems are more complex,

investment levels are higher, repairs must be made by professionals and failures impact more

people. This discipline is necessary when developing ownership as well as rental tenure housing.

For example, if low-income buyers stretch their family budgets to afford mortgages, they may not

collectively have the resources or discipline to save for necessary capital improvements.

Moving forward, local governments and property developers receiving government support

should be supported to develop a property stewardship plan, particularly in the case of Rusunawa

housing. This plan should include:

Staffi ng plan

Role of private sector contractors

Operating budget and multi-year projections

Capital needs projections and reserve analysis

Market / targeting plan to include measures such as: population to be served, rent-setting and

infl ation, tenant selection.

Government should also explore setting requirements and SOPs that relate to construction

standards (materials, design and spatial planning), as well as operating standards (management

protocols, tenant selection, annual budgeting and multi-year projections, etc.) and capital needs

standards (multi-year projections and reserve sizing).

The property management standards and procedures that are developed will need to be socialized

with local governments during project initiation and then monitored and reported systematically

in order to allow local governments to qualify for additional project funding where performance is

high, or additional support, where the performance is lagging.

5. Incentivize Private Developers to Build Affordable Housing

The GoI currently extends a series of tax incentives under the Rusunami program including transfer

tax reductions from 5% to 1% to developers and VAT tax forgiveness to buyers as a means to

promote affordable housing production and home ownership.

First, phase out Rusunami tax incentives, which are not suffi ciently robust to drive production,

are not sized to actual household need and are diffi cult to monitor. Under this Roadmap, existing

Rusunami transfer tax and VAT incentives would be replaced with the mortgage-linked, down-

payment assistance mechanisms discussed previously in this section. These offer greater

population and geographic targeting potential and the ability to size subsidies according to

household need rather than price point. They will also offer greater simplicity and direct reporting

which will increase quality of management and real-time understanding of the production levels

supported.

127 | Annexes

Second, strengthen the enforcement of inclusionary development requirements in strong markets. Current law requires that new ownership housing developments include some units

geared toward lower income target groups, in the 3:2:1 model61. If enforced consistently, these

requirements have the potential to be a major driver of affordable housing production as well as

social and economic integration. Specifi c methods or modes of enforcement can be developed by

the MPWH or Pokja PKP and shared with cities, such as additional fi nes or penalties, cancellation

or non-renewal of construction permits, or additional incentives, such as developer preferences as

partners for development of public land assets and in public housing projects.

Third, enhance the mandate and support the institutional strengthening of Perumnas to

act as lead developer for mass housing production across all typologies and tenures. Land made

available to Perumnas through the under-utilized public land mobilization program can also be

made available to private developers for low-cost housing production targeted at the lower-middle

class (e.g. deciles 5 to 6), in addition to the supply of core/row housing and multi-family units

targeted at lower-income groups. This activity will help to support the fi nancial viability of the

program as well as to promote mixed-income communities and development of the private real

estate sector, as has been the case with TOKI in Turkey and Al Omrane in Morocco.

6. Increase Housing Production by Supporting Developers’ Access to Debt

Indonesian developers currently rely heavily on their own equity and that of investors to fi nance

land acquisition and construction of housing units for ownership housing. In the very limited market

of professionally-owned and managed rental housing, there appears to be no commercial lending

whatsoever. This has been reported by developers as a major barrier to their ability to increase

production levels. In addition, this equity-rich capital structure limits the ability of developers to

share risk, requires them to demand higher returns and constrains their ability to produce units.

As a result, their products tend to migrate ‘up-market’ to serve higher income buyers and renters.

The Roadmap suggests exploring government support toward improving the availability of

construction fi nance in the interest of stimulating affordable housing supply. Such a program could

also add a special focus on building a commercial lending market for permanent rental housing.

This initiative could aim to address the primary concerns of lenders, which include payment

capacity, occupancy and market risk, and their own capitalization requirements.

An example of a potential rental transaction is:

Utilize underwriting expertise of existing commercial lenders, translating their experience in

offi ce and hotel underwriting, with special training.

Comprise less than 10% of new housing development (maximum of 65,000 units), in the fi rst

year62.

Require participation of developer / owners, not turn-key developers.

Include developer/owner equity of 25%-35%.

Offer tenors of 15 – 20 years.

Working with BTN and other willing and experienced commercial lenders, the government could

carry out the design and assess the feasibility of different approaches to extend market-rate

construction fi nance. There are many international precedents of the different mechanisms that


62 BTN’s own assessment of the potential for rental housing to satisfy new housing demand.


could be considered for Indonesia. These include partial guarantees of loans or tenant payment

streams, loan participations, interest rate buy-downs and liquidity mechanisms. A review of these

options will be the fi rst step; followed by detailed design of the chosen model and a limited roll-out.

Implementation Plan

Immediate Term (0-12 months)

Core Unit/Row Housing Program:

Select a sample of ten to fi fteen primary and secondary cities based on capacity, geography,

need, etc.

Convene key stakeholders from central, provincial and local government, as well as relevant

private sector, fi nancial sector and civic leaders, for participatory design of delivery systems

and program parameters, aligned with capacity building on incremental housing design, etc.

Identify suitable locations and conduct community need assessments and action plans through

a simplifi ed approach (e.g. participatory rapid appraisals).

Reformulate the Rusunawa Program:

Establish systems to qualify high-capacity local governments.

Designate Perumnas as developer for low-capacity local governments.

Gather information and determine actual total development costs and operating expenditures

based on experience from existing projects in order to create realistic budget for future.

Develop training and resource manuals for capacity building of central and local governments

for program delivery.

Increase private sector affordable housing production:

Announce end of the Rusunami tax incentives and set the deadline for fi nal project certifi cation.

Strengthen the implementation of inclusionary development requirements by establishing

regulatory frameworks that enable local governments to enforce Law No. 20/2011 and

promote tested methods and models.

Consider international experience with support to developer fi nance, against Indonesian

realities, to determine the appropriate structure/mechanisms.

Short Term (1-2 years)


Implement at least 15 projects of 200 to 1,000 units each to test ideas.

Discuss and revise the program approach based on peer learning in order to refi ne policies and

to create an enabling environment for scale-up and replication.

Exchange fi ndings and conclusions with other cities based on peer learning.


Increase public rental production levels by establishing fi rst-come, fi rst-served allocation

system.

Expand types of funding available to local governments, including ongoing capacity building

and operating subsidies in addition to capital subsidies.

129 | Annexes

Include property and asset management requirements in funding allocation threshold criteria.

Reset tenant eligibility and rent methodologies.

Track TDC, operating, replacement and production under the new program.


Establish tax benefi t phase out in sync with the launch of the mortgage-linked down-payment

assistance program.

Share inclusionary zoning systems with local governments and monitor and enforce

implementation.

Detailed design of a limited program to test support to construction fi nance and/or other

private sector incentives.

Medium Term (3-5 years)


Replicate the program in other cities, based on best lessons and local adaptation.

Scale number and size of projects in participating cities. Address capacity and resource

constraints through improved delivery system, serviced land supply, fi nancial markets, etc.

Diversify the housing mix in larger projects to avoid socio-economically segregated settlements,

develop a larger variety of starter cores and other public and market-based housing units

and other land uses (e.g. commercial and manufacturing for livelihood development and

industrialization).


Shift to a competitive allocation system.

Consider expanding participation and roles of private developers.


Scale up program to support access to developer fi nance or other private sector incentives to

stimulate affordable housing production.

Annex 4.6 Mortgage Markets


Mortgage Sector Background

The mortgage market, although growing, remains shallow63. Mortgage lending, despite its fast

growth, is still moderately developed in Indonesia relative to the country’s overall wealth: IDR 325

Trillion in June 2014, or slightly over 3% of GDP and about 9.5% of total bank credit. The supply is

relatively concentrated - the three main fi nancial players have consolidated market share of about

70%, although housing loans are offered by all major commercial banks. There is little product

diversity. Almost all (non-state assisted) loans have a tenor of between 10 and 15 years and carry

a fl oating interest rate indexed to Bank Indonesia (BI)’s policy rate – currently around 12%. Fixed

rates are only offered in some cases for a short initial period before switching to fl oating rates.

Sharia-compliant housing fi nance is widely available in Indonesia.

63 In-depth analyses were conducted in 2013 and 2014 by the World Bank .


Mortgages are estimated to only cater to the top two deciles of the income distribution, yet the

government aims to deepen it. Housing fi nance should become available for the “missing middle”

of underserved, yet bankable households, i.e. those with income placing them in Deciles 4-8.

A continuum will thus develop in the access to decent housing – from lower-income groups for

whom alternative measures to mainstream housing fi nance must be offered, to the higher-income

households whom the market already serves.

Obstacles to the deepening of the mortgage market lie fi rst on the demand side. These are:

The low degree of fi nancial inclusion. Only 19.6% of the population aged 15 and over have

access to a bank account. Branchless banking, a very important access factor given the

geographical structure of the country, is in its infancy. Although, a legal and prudential

framework is underway to support its development.

The level of housing prices in urban areas, which varies depending on location, has been

experiencing a stark increase in the recent few years, especially for small housing units, thus

limiting effective demand.

The large share of the population active in the informal sector of the economy – estimated at

60% of employment64. There is a lack of experience to assess actual incomes and credit-risk

of households that source their income from informal sources, meaning that banks typically

abstain from lending to this category.

Obstacles also exist in the supply of affordable housing fi nance. These include:

The incomplete geographic coverage of the land registration system, which limits the availability

of mortgageable titles.

A lack of long term funding. The Indonesian banking sector has traditionally a high Loan-to-

Deposit ratio (more than 90% in September 2014 overall, and 108% in the case of BTN).

However, the capital market remains a very marginal source of funding, BTN being the main

user of this channel65. Liquidity is therefore a systemic concern (and a major objective of macro-

prudential regulations) that, in many cases, constrains the development of long-term lending.

The structure and strategies of the banking system. Public sector banks tend to concentrate

where they historically have a competitive advantage, and are not necessarily keen to develop

their activity in the low and middle market segments that are BTN’s area of specialization.

Regional Development Banks (RDBs) could be more active in these segments, but their lending

activity is limited. In the private sector, intermediation margins are high, and the extension of

smaller loans that involve customized risk assessment processes is handicapped by lower

profi tability. The same profi tability considerations are probably behind the limited mobilization

of long-term resources from the capital market. This is currently the case, with a very steep

yield curve of government bonds (SDN) from 0 to 5 years;66 this makes such resources

comparatively expensive (see Figure 12). Note that, conversely, banks hold one third of the

SDN outstanding.

64 70% if irregular workforce in the formal sector is included. Source: International Labor Offi ce 2013 Women and Men in the Informal Economy : a Statistical Picture

65 IDR 54 trillion in the consolidated liabilities of commercial banks at the end of 2013 , compared to 3,800 trillion deposits. BTN’s capital market debt is estimated to amount to about 13 trillion at the end of 2013 (without securitization).

66 A less unfavorable yield curve should result of the decline of infl ation expectations that the deceleration of the price increase should eventually trigger.

131 | Annexes

Figure 12. SDN yield curve November 12, 2014

IPBA Yield Curve

Last Month

Last Week

Yesterday

Today

9.50

9.00

8.50

8.00

7.50

7.006.50

6.00

5.50

5.0005 10 15 20 25 30

Maturity (Year)

INDONESIA GOVERNMENT BON DS YIELD CURVE

12-Nov-14

Yie

ld (%

)

Source: Indonesia Pricing Agency.

The government has developed a series of programs and institutions to overcome these obstacles. These include:

1. To provide, or help raise, long-term funding for mortgage lending, a state-owned intermediary,

PT Sarana Multigryia Finansial (SMF), was created. Its mandate is (i) to issue bonds and pass

on the proceeds to lending institutions, and (ii) to help arrange securitization transactions. Its

interventions target loans of a maximum amount of IDR 500 million, i.e. the upper end of the

mid-market. SMF enjoys high, although not top, grades from rating agencies (AA from Fitch,

AA+ from PEFINDO). It has provided refi nance loans for an outstanding amount of IDR 6.2

trillion at the end of 2013, and arranged 6 securitization transactions for BTN totaling IDR 4

trillion, in which it also provided some credit enhancement.

2. Various subsidy schemes have been developed over time. In particular, interest rate subsidies

based on BI funding in the seventies and, from 2005 to 2010, a direct demand support

program in which two options were offered by the government: a down-payment subsidy, or a

buy-down subsidy, which assumed part of the interest payments. This program was replaced

at the end of 2010 by a new scheme, FLPP, managed by Ministry of Housing through a semi-

autonomous BLU structure. The FLPP scheme pursues two objectives: subsidizing interest

rates for individual borrowers and provision of long-term funding to lenders. The recycling

of capital repaid by the lenders is supposed to warrant the durability of the mechanism; this

revolving principle is a major part of the rationale to house the scheme in the BLU structure. In

addition, FLPP was designed to bring fi xed rate loans into the mortgage system, an important

feature in the case of low-income borrowers whose earnings are insuffi cient to cushion interest

rate hikes.

3. FLPP supports fi nancial institutions by lending them funds at deeply concessional terms (up

to 20 years, 0.5% interest rate). These loans contribute to 75% of the mortgage amount


extended by lenders, who are responsible for funding the remaining 25%. Mortgages must

have a fi xed interest rate of 7.25% p.a., and benefi t households who meet specifi c eligibility

criteria. These criteria are mostly about income and price limits. Currently, household income is

not suppose to exceed IDR 4 million per month or IDR 7 million per month, for landed houses

and apartments respectively. Home prices are capped at IDR 115-130 million for landed

houses and 250-300 million for apartments, depending on the geographic area67. These limits

have been raised several times since FLPP’s inception. From the last quarter of 2010 until the

end of 2014, FLPP will have helped fi nance about 340,000 new units for a cumulative fi nancing

volume of IDR 15 trillion.

4. To mitigate the increased credit risk of low-income borrowers, FLPP-supported mortgages

are guaranteed by the state-owned insurance company, ASKRINDO. This credit enhancement

is provided at extremely favorable terms. The guarantee now covers 100% of loan balances,

claims are payable as soon as loans are in default68, and the insurance premium, which includes

life and property insurance beside credit default, has been reduced to a very low 0.24% p.a.

Diagnostics of Government Strategy

The impact of government interventions has been generally below expectations. This section

evaluates the role and performance of SMF, FLPP, and mortgage guarantors.

Analysis of SMF. SMF is a well-run institution that charges a reasonable margin (0.5%). It has

helped to jumpstart a previously non-existent mortgage secondary market. It has been conducting

commendable efforts to diversify the partnering primary lenders, with some success. SMF has

now refi nancing arrangements with 13 institutions, including 3 Regional Development Banks and

Multi-fi nance companies, although BTN remains by far SMF’s main customer. SMF diversifi ed its

product offering, including Sharia-compliant refi nancing loans and short-term liquidity support. It

is also providing technical assistance to new, or small, lenders, and training on securitization both

to lenders and investors.

Nevertheless, SMF has not had as much impact on primary lending as was envisaged at

its creation. Its support represents hardly more than 2% of the mortgage market (3.5% with

securitization deals), and consequently, the institution appears relatively overcapitalized, with a

debt-to-equity ratio, of 1.769. Moreover, the term of funds it channels to the mortgage system has

become increasingly short – lately it has been limited to only one year maturity70.

One clear factor behind SMF’s limited success is the cost of the resources channeled through

it. In addition to the yield differential between capital market and deposits, SMF is handicapped

by the spread of its bonds over Treasury bonds: 200 to 250 basis points, or a higher spread

that BTN’s bond issuances enjoy. These conditions are not in line with the strong security

profi le of the company, which comes from multiple factors: (i) state ownership; (ii) the low risk

of lending to fi nancial institutions; (iii) the pledging of mortgage portfolios it refi nances, with an

overcollateralization requirement; and (iv) the soundness criteria required from the loans included

67 Excluding outlying real estate sub-markets where prices are specially high

68 More than 4 month arrears.

69 The credit enhancement provided in securitization transactions (limited guarantee of interest and expenses payments) must be taken into account in the assessment of the capital need, but the scope of this contingent liability is likely very small.

70 SMF accordingly launched a Medium Term Note program (370 days to 5 years) instead of full-fl edged bonds.

133 | Annexes

in these portfolios. In contrast to similar mortgage refi nancing facilities elsewhere, SMF bonds do

not receive any favorable treatment in investors’ portfolios, be it institutional investors or banks

that would be consistent with the degree of security its debt offers.

There is untapped potential for attracting funds from institutional investors. This component of

the fi nancial system is relatively small in Indonesia – about 10% of GDP71, although interest is

growing, especially in the case of insurance companies, 44% of the latter being life insurers, which

are natural long-term investors. According to BI72, the aggregated volume of assets managed by

the insurance industry, pension funds (including 40% attributable to Jamsostek) and fi xed-income

mutual funds exceeds IDR 800 trillion. Banks that are not large housing lenders are also a potential

source of funds to target.

Analysis of FLPP. FLPP has been supporting 68,000 units on average per year since 2010, i.e.

the same volume as the previous subsidy scheme. It has fallen well short of the planned objective

of fi nancing 1,350,000 units in 5 years, or 270,000 annually on average.

The under-achievement of the FLPP scheme has several causes: (i) infl ation of housing prices, and

the unavoidable lag of the scheme to adjust to these. The same dynamic probably explains, at

least in part, the upward shift of the actual benefi ciaries towards more affl uent targets than initially

planned; (ii) irregular and under-calibrated73 public allocations, which declined sharply in 2013

and 2014; and (iii) low leveraging of private resources, the volume of credit mobilized beside the

government allocation amounts to 25% of loans fi nanced by the lenders.

Overall, very few institutions are participating in the scheme, although 22 have entered into an

agreement to do so, half of which are RDBs with limited mortgage lending activity. BTN, and its

Sharia subsidiary, have extended 95% of the FLPP-supported loans. The participation of private

commercial banks is negligible. The limited participation of fi nancial institutions acts as a bottleneck

for extending the reach of the government’s assistance. BTN’s network only represents 1.5% of

the 19,000 commercial bank outlets in the country. Its partnership with the Post Offi ce (over 3,000

outlets) will give a boost to its geographic coverage once the role of the local post offi ces in the

origination of mortgages is well established. However there is further potential for widening the

distribution network for subsidized mortgages.

One achievement of the scheme has been on the credit risk front. The delinquency level is far

below the previous subsidy program, with NPL rates in BTN’s portfolio of 1.45% and 10.34%

respectively (June 2014). As stressed by BTN, the fi xed rate feature of the subsidized mortgage

loans was instrumental in keeping NPLs low. However, a more in-depth analysis would be useful.

First, ASKRINDO reports a 25% rate of claims on its portfolio, which gives a very different picture

even if most of the claims are motivated by risks other than the credit risk. Second, it would be

necessary to factor in the age of the two types of portfolios, as well as the upwards shift of the

actual incomes of households benefi ting from FLPP, as currently only base incomes are reported.

This shift in the household targeting requires some further analysis in itself. It is likely to be linked

to the appreciation of prices and the dearth of affordable housing supply, but other factors have

probably also played a role, such as the fact that income ceilings are applied to individual borrowers’

71 IMF / World Bank 2010 FSAP.

72 Financial Stability Report, March 2014.

73 The initial appropriations implied an allocation of IDR 13 to 16 million per unit, whereas the actual consumption of fi nance has actually been above 40 million.


base rate, and not to household incomes, or inclusion of employment benefi ts. The largest gap in

the coverage of the scheme remains however the exclusion of informal sector households. This

category is basically unserved despite its large share among lower income groups74.

Analysis of ASKRINDO. FLPP-supported loans must be guaranteed by Askrindo. The company

therefore accepts all loans, without adding any soundness criteria to their eligibility for coverage.

Furthermore, it seems that there is little check of the validity of claims, the vast majority of which

are accepted. This is a matter of concern, since the credit risk is now entirely transferred to the

government. As such, the existing design of the guarantee mechanism is conducive to moral

hazard and promotes lenders to relax risk management practices instead of strengthening them.

If these risks were to materialize, it would jeopardize for a long time the trend towards a more

inclusive mortgage market.

The cost of government interventions is fairly high, although mostly implicit.

On the liquidity front, SMF has been endowed with a signifi cant amount of capital by the State

(IDR 2 trillion, susceptible to be increased to IDR 4 trillion75). But beyond this explicit support, state

control implies that the institution enjoys a quasi-government guarantee for its bond issues. This

is a contingent liability that is purely nominal today, but could eventually lead to actual fi nancial

support in stressed situations, as seen in other markets with government-backed refi nancing

institutions – starting with the giant Fannie Mae and Freddie Mac in the US, but also in Mexico

with Sociedad Hipotecaria Federal.

Besides receiving 58% of the government budget allocated to housing76, FLPP includes a large

subsidy element resulting from the difference between the government cost of funds and the rate

of return of this particular investment. At current market conditions, the rate of subsidy embedded

in 20 year loans to primary lenders, i.e. the net present value of this difference over time, is around

55%, or about 24 million per unit on average since 2010 (30 million in 2014). Taken into account

the 25% of mortgage loans fi nanced by banks, the portion of subsidy in a FLPP mortgage is

between 40% and 45% (see Box 1). This is an economic evaluation, which does not appear in the

State budget. Note that the absence of a clear assessment measure is not conducive to optimize

the cost/ benefi ts balance of the scheme.

Moreover, it is unlikely that FLPP can achieve steady state equilibrium. Because of the long

maturity of its loans, the cumulative amounts of capital repayments will only slowly reconstitute

the initial endowments, and the value of the recycled amounts will be eroded by price increases

in the meantime. This means that the government will have to continue to allocate funds to FLPP,

as it does for explicit subsidies.

In the case of the guarantee, the premium charged is clearly below the level that would

warrantee stand-alone sustainability of the scheme. ASKRINDO is periodically re-capitalized

by the government, and although this has not been the case specifi cally for the subsidized

housing programs, future capital injections are likely. This is a signifi cant contingent liability of the

government that should be monitored.

74 BTN does lend to independent workers, provided however that they their activity is recorded in formal accounts

75 SMF’ total equity is IDR 2.8 Trillion

76 Affordable Housing Finance Policies in Indonesia Bappenas, presentation at the World Bank global Housing Finance Conference May 2014

135 | Annexes

Overall, the total cost of explicit support, implicit subsidies and contingent liabilities incurred by the

government for encouraging the provision of housing fi nance is fairly high but is not refl ected in its

budget for the most part. The relevance of the policy is not questionable. However, the fact that

the aggregated cost of the government‘s involvement is not transparent to policy-makers may

distort the rationality of resource allocation, and lead to overlooking ineffi ciencies of the system

if interventions are perceived as cost free. Given the relatively low impact of government efforts,

which despite their magnitude have triggered little response from the banking sector, a deep

structural reform of the components of the government strategy appears necessary.


The Roadmap recommends a strategy that uses four pillars: (i) developing a more effi cient and

more inclusive subsidy policy (ii) stimulating the market-based provision of long term funding;

(iii) avoiding credit risk slippage and moral hazard phenomena, especially at the expense of the

State; and (iv) increasing the number of lending institutions active in the affordable housing fi nance

system.

A. Improve the Economic and Social Effi ciency of Credit-Linked Housing Subsidies

The subsidy policy is the starting point of a new strategy, since assessing the conditions of its

optimal impact highlights the need to strengthen other government actions and instruments.

Beside interventions on the housing supply chain to make affordable prices more widely available,

the key improvement of the current mechanism is to measure and minimize its economic cost,

multiply its impact by leveraging more resources from the banking system, and expand its reach

to underserved categories. The institutional design, and in particular, the integration of SMF as a

potential liquidity channel, would need to be carefully studied prior to rolling out reforms.

Develop a Down-Payment Subsidy linked to Mortgage Finance

The main recommendation is to transition to a direct demand subsidy system, either with up-front

or buy-down subsidies. If well designed and operationally set-up, this type of subsidy should allow

a much larger outreach than the current FLPP for the same economic cost to the government.

Table 17 shows the cost to the government, both in terms of initial budget outfl ow and Net Present

Value, of the three subsidy types which achieves the same affordability level as the FLPP currently

does, assuming a regular increase of incomes after year 1 in the case of the buy-down subsidy77.

Table 17. Cost of Subsidy Type, as a % of Mortgage Loans

Interest rate on

mortgage loans

Initial government

spending

Economic cost

(Net Present Value)

Current FLPP 7% 75% 42%

Down-payment subsidy11% 25%

12% 30%

Buy-down subsidy paid up-front

(assuming a 5% p.a. income

increase)

11% 8.5% (6 years)

12% 13.5% (8 years)

77 i.e. An annual mortgage servicing payment of IDR 944 for each IDR 10,000 borrowed (20 year loan).


Simulations show that the same economic cost could support between 1.5 to 3 times more

mortgages than the existing instrument, for interest rates prevailing at the end of 2014 in the

mortgage market.

The structuring of a new scheme would require feasibility studies and cautious design, in particular

to draw the lessons from the previous program.

As an example, a possible scenario for structuring of the down–payment assistance could be as

following:

The core of the system could be a new interest buy-down subsidy, coupled with a buffer

against interest rate surges.

An upfront subsidy payment would be made to participating lenders, for instance, at the level

of a down-payment subsidy, with the same affordability impact.

This upfront payment would be divided in two parts: the provision to cover buy-down interest

charges for a certain number of years (8 years for instance), requiring an initial contribution of

13.5%, and an allocation to the interest fl uctuations buffer for the balance (16.5% of the loan).

The buffer would be drawn down when needed to maintain debt servicing to income ratios

as constant as possible. At the end of the coverage period, possibly longer than the subsidy

period itself, any balance left would be returned by the lender to the government.

Using such an approach, the BLU structure within MPWH would still be useful. If well-designed

and operationally set-up, this type of subsidy should reach a much larger number of benefi ciaries

than the current FLPP (1.5 to 3 times) for the same economic cost to the government.

Note that a lease-to-own product is not recommended as a solution78. This instrument, which is

often developed to encourage credit discipline when enforcing mortgage rights, is not effi cient,

especially for borrowers who do not have, at the onset, any equity to invest in the home they want

to buy. The effi ciency of the mortgage rights is not a major issue in Indonesia. Moreover, lease-

to-own options can be expensive, are particularly sensitive to lack of long term funding (similar to

rental investments), and raise relatively complex legal and tax questions.

78 Except in its Islamic Finance version (Ijara), which refl ects other objectives.

137 | Annexes

Box 2. FLPP Economic Cost and Comparison with the Down-Payment / Buy-Down Subsidy Scheme (2005 – 2010).

The cost of FLPP to the public results from two factors: (i) infl ation, which reduces the value of the cash fl ows received over time and affects the actual recycling capacity of the revolving fund; and (ii) the yield - in real terms after infl ation- of State Bonds (SBN) that is above the return of their investment in FLPP. The difference between the loan amount allocated to primary lenders and the Net Present Value (NPV) of the cash fl ows received by the BLU measures the subsidy element in the refi nancing mechanism, which is 55% at currently prevailing conditions.

The rate of subsidization of the mortgage loan derives from the subsidy amount, by taking into account the share of fi nancing assumed by the primary lender, i.e. 33% of the FLPP contribution. The subsidization rate varies as follows in several scenarios:

Infl ation SBN real rate 3% 5% 7%

0% 19.0% 29.8% 37.9%

1% 24.9% 34.3% 41.4%

2% 30.0% 38.2% 44.5%

3% 34.5% 41.7% 47.1%

Comparison FLPP / 2005-2010 subsidy scheme

Cumulative realizations(IDR billion)

Cumulative number of

units

Realization per unit

(IDR million)

Subsidy amount per unit

(IDR million)

FLPP 2010-2014 14,700 338,300 43.5 2479

Direct demand

subsidies 2008-201080

1,112 337,443 3.3

Source: Ministry of Housing

79 80

Reform FLPP by shifting to a Limited Liability Structure and Market-Rate Pricing.

In the short term, reform the mechanics of the liquidity support provided under the FLPP program

to increase the number of fi nancial sector participants and reduce the overall cost to government,

while maintaining long-term funding for banks and fi xed-rate mortgages for consumers.

Specifi c reforms that are recommended include reducing the interest rate subsidy to the lenders

by setting the cost of funds at the long-term government bond rate (currently around 8.5% p.a.).

In addition, consider reducing the “bank co-pay” requirement and altering the process of funds

disbursement to lenders by confi rming borrower and property eligibility and transmitting the funds

prior to loan closing, in order to achieve the goal of widening lender participation and lowering

entry barriers, particularly for smaller fi nancial institutions and regional banks.

Shift the administration of the liquidity facility to a regulated fi nancial entity under a limited liability

structure in order to signifi cantly strengthen program administration and increase control over

loan underwriting and servicing practices. SMF is recommended as a potential candidate for this

role. Finally, improve the reporting requirements to put in place stronger controls for borrower

compliance.

79 55% of refi nancing loans.

80 Only the last 3 years are considered to limit the impact of housing price increases on the comparison between the 2 successive mechanisms


Only after these corrective actions are adopted to strengthen program effi ciency, sustainability and

targeting to low-income households, should the government consider increasing fi scal allocation.

Explore Ways to Provide Housing Loans to Informal Sector Households.

Efforts to expand access to housing fi nance to lower, yet creditworthy, income groups should

include mechanisms to address the majority of households active in the informal sector. A three-

pronged strategy is recommended, which includes: (i) building the capacity to assess credit

risk linked to undocumented incomes, including the methodology and information to estimate

their income levels and the share of income available for debt repayment. This could be done,

for example, via regularly conducted surveys and the dissemination of their results; (ii) promote

savings-for-housing products, to enable lenders to check the savings capacity of would-be

borrowers; and (iii) assess the feasibility and conditions of a guarantee product specifi c to this

category of borrowers.

This strategy should prioritize cooperation with banks active in the micro-fi nance sector and

selected community-based institutions, possibly some cooperatives, which are already familiar

with the informal economic sector. Pilot projects could be initiated to test the viability of the tools

and practices developed for this purpose.

B. Develop Market Capacity to Provide Adequate Funding and Manage Financial Risks

Despite (i) the liquidity constraints of the banking system, (ii) the existence of institutional investment

capacities, and (iii) the availability of a well-conceived intermediary entity to bridge both, there is

an enduring defi ciency to mobilize long-term resources from the bond market. The policy should

primarily focus on correcting this market failure, rather than aiming to offset it through the allocation

of scarce, and irregular, fi scal resources. A progressive switch to the market as the provider of

critically needed long-term, fi xed-rate funding will free up public resources in the medium-term for

other usages.

Adjust SMF bond status

It is of utmost importance for SMF to fulfi ll its mandate that its bonds benefi t from a regulatory

treatment that refl ects the high degree of security of the company as described above.

Amendments to existing frameworks should include: a relaxation of risk concentration limits in

the case of institutional investors; the lowering of risk weights for capital adequacy purposes in

the case of banks; the eligibility of bonds to the repo operations of Bank Indonesia, and to banks’

liquidity ratios, in particular the qualifi cation of liquid assets for the liquid assets-to-core deposits

ratio, a major indicator of fi nancial stability in Indonesia. Some of these changes may imply putting

SMF under the purview of OJK.

Strengthen assets/ liabilities balance requirements

Indonesian banks do not demonstrate a proactive policy to match long-term loans such as

housing loans with corresponding debt. It must be assessed whether banking regulation should

be strengthened in this respect, in addition to the requirements applied to Loans-to-Deposits

ratios. The OJK prudential regime applicable to banks should be reviewed along with rules or

guidelines to mitigate liquidity risks that constrain the development of affordable housing fi nance.

139 | Annexes

The introduction of the Basel III regime in Indonesia provides an opportunity for changes, both

for short-term liquidity considerations, with the new Liquidity Coverage Ratio, and for long-term

funding requirements with eventually the new Net Stable Funding Ratio.

Promote market practices that mitigate the risk of fl oating interest rates for bor-rowers

Lenders should be encouraged to better mitigate the risks that fl oating rate mortgages create for

borrowers, which translate into credit risk for the lenders. This can involve, for instance, averaging

short term indexes over several months to smooth out rate fl uctuations, extending the periodicity

of the resetting of rates to longer time intervals, possibly in parallel to SMF refi nancing operations,

or lengthening the maturities of loans to a certain extent to avoid, or limit, the increase of monthly

installments. Variable rate loans with these type of features could be eligible to the subsidy program.

C. Reform State Credit Guarantees

The guarantee scheme should ensure that loans it supports are based on sound origination

principles and that adequate recovery actions are taken by lenders before fi ling claims. This would

limit the government’s contingent liability and promote sound and sustainable practices in the

market.

In consultation with lending institutions, OJK could develop a set of standards that would need

to be met for the loans to be eligible to the guarantee, instead of automatically providing the

coverage. The regulator could then consider lowering the risk weight of mortgages complying with

these conditions, which would be a signifi cant and economically justifi ed incentive for lenders to

develop this type of lending.

Eventually, the revised guarantee facility could become available to a broader range of low-income

borrowers, even for non-subsidized mortgages. This could encourage institutions that are not

participating in FLPP, or another subsidy program, to consider lending to large underserved

market segments, including informal sector households.

It would be important for the soundness of the scheme that the risk being covered by companies

is economically valued. The level of premiums needed to cover expected losses should be known,

even if the benefi ciaries only pay for part of it. The implicit government subsidy would thus be

measured, as well as the economic capital required to cover stressed situations. Risk modeling

will be needed to conduct these actuarial evaluations.

D. Promote the Diversifi cation of Lenders Active in Low-Income Market Segments

Provide technical assistance to potential lenders

Serving lower income customers requires adjusting ordinary lending and servicing methodology

and processes. Risk assessment needs to be customized and processes need to be reengineered

to mitigate the higher origination and servicing cost of smaller loans. Recovery practices need to

be revisited to allocate more emphasis on loss mitigation rather than foreclosures, which might

be less appropriate than in the case of wealthier debtors. In addition, special attention must be

granted to consumer education and information.


Technical assistance is needed to help potential lenders conduct the necessary adjustments.

SMF, which already has developed technical support programs for new-comers to the market,

could play a pivotal role in this respect by expanding its services to cover this support to lenders.

Scope of the assistance should include setting up operating conditions, defi ning organizational

adjustments, setting lending and servicing standards and designing procedure manuals. In

addition, setting up staff training programs in these new processes will be critical.

Contribute to lower operational costs and adjustment processes

The entry in a new, and challenging, market segment involves signifi cant investments by potential

lenders. It may imply creating new sale points in underserved locations or developing low cost

payment technology81, to develop customized procedures, and train staff to apply them adequately.

These developments would not fi t into the general corporate strategy of some institutions. But in

other cases, the consideration of the investment cost would be the main roadblock. Assistance

for trainings and development of new products and systems could be considered for fi nancial

institutions that would invest in the low-income market segments. These advisory services could

be provided for a fee, which could be foregone if verifi able results can be demonstrated.

In a similar and complementary vein, the government could consider organizing tenders to

stimulate the interest of new participants in the use of these advisory services to test new market

segments, while enlivening competition and encouraging a reduction of the currently very high

intermediation margins in the banking system.

Encourage new business models

New commercial approaches can be explored to provide small mortgages in an economically

viable manner. As an illustration, one approach that has been successfully tested in some

countries (India, Senegal) relies on the design and facilitation of standard development fi nancing

models to structure tripartite arrangements between a group of home-buyers, a lender and a

developer. Potential demand is aggregated, creditworthiness of the group members is assessed

by the lender, future borrowers are pre-qualifi ed and savings are collected. A ’wholesale’

agreement is established with a developer that develops units to match home-buyers’ needs,

in terms of characteristics, location and prices. During the construction phase, down-payments

are built up and deposited with the fi nancial institution, which also facilitates the fi nancing of the

development. Costs are reduced thanks to this standardized “industrialized” or group approach,

credit risk is limited for the lender, as is the market risk for the developer, as buyers are brought to

developers by the mortgage lender, not the opposite (quasi pre-sales). MPWH agents in charge of

distributing housing subsidies could play a role as facilitators of such arrangements.

81 A legal and regulatory framework for branchless banking is under way, pilots to test mobile banking systems have been developed with BI’s support.

141 | Annexes

Implementation Plan

Immediate Action (0-12 months)

Design a new direct demand subsidy/ down-payment assistance program.

Prepare the reorientation of FLPP onto market-based long term liquidity scheme.

Align SMF’s status vis-à-vis institutional investors’ and banks’ prudential regime with the high

quality of its bonds.

Conduct a consolidated assessment of all implicit subsidies supporting low-income housing

fi nance.


Fully transition to demand subsidy/down-payment assistance scheme, linked to a market-

based liquidity support model, including the secondary mortgage market entity SMF.

Develop a permanent evaluation system of government interventions to support low-income

housing fi nance.

Develop market practices that mitigate fl oating interest rate risks incurred by borrowers.

Assess the feasibility and conditions of expanding access to housing fi nance for informal sector

households.

Design restructuring of mortgage guarantee products towards risk reduction and not only risk

transfer-instruments.

Develop and pilot approaches for attracting new players into the low-income market segments.


Reform mortgage guarantee schemes, including the introduction of a specifi c product for

informal sector borrowers.

Expand government support toward diversifying lenders active in providing affordable housing

fi nance to low-income market segments.


5. Overview of Recommended Policy Actions

Action 1. Develop a Comprehensive Slum Upgrading Program to improve existing slum and squatter

settlements.

1.1 Design the Framework for a National Slum Upgrading Program Immediate

1.2 Launch Phase 1 of the City-Led Slum Upgrading Program Short Term

1.3 Scale National Slum Upgrading Programs to all Cities and Areas Medium Term

Action 2. Reformulate the Approach to Formal Subsidized Housing including different typologies

(core starter units, row houses, vertical housing) and tenure options, (rental, shared-equity,

owner-occupied) to respond to different stages in the housing career.

2.1 Revitalize Perumnas’ Role as Master Developer in Public Housing Production Immediate

2.2 Introduce Starter Core Units as a Housing Solution Immediate

2.3 Reformulate Public Sector Support to Multi-Family Rental Housing Short Term

2.4 Require and Support Good Asset and Property Management Practices Medium Term

Action 3. Redesign Support to Home Improvement to expand focus to low-income urban areas and

incorporate construction assistance, titling and crowding in of housing microfi nance.

3.1 Strengthen the Design and Delivery of the Existing Home Improvement Subsidy Immediate

3.2 Link Home Improvement Subsidy to Other Public Housing Programs Short Term

3.3 Enable Home Expansion for the Urban Middle Class Medium Term

3.4 Support Development of Local Building Industries Medium Term

3.5 Support Development Of and Crowding in of Housing Microfi nance Sector Medium Term

Action 4. Enable the Affordable Formal Housing Market and Increase Private Sector Participation to make low-cost formal housing and affordable mortgage fi nance more readily available to

low- and middle-income households.

Part A: Improve the Economic and Social Effi ciency of Government Support to Deepen the Mortgage Market

4.1 Develop a Down-Payment Subsidy linked to Mortgage Finance Immediate

4.2 Reform FLPP by shifting to a Limited Liability Structure and Market-Rate Pricing Immediate

4.3 Regulatory and Institutional Strengthening of SMF Short Term

4.4 Reform State Guarantees for Housing Finance Short Term

4.5 Explore Ways to Provide Housing Loans to Informal Sector Households Medium Term

4.6 Introduce Complementary Measures to Diversify the Mortgage Market Medium Term

Part B: Stimulate Private Sector Supply of Low-Cost Affordable Housing

4.7 Incentivize Private Developers to Build Affordable Housing Short Term

4.8 Increase Housing Production by Supporting Developers’ Access to Debt Medium Term

143 | Annexes

Action 5. Build Robust Delivery Systems where capacity building, funding and responsibilities are

transferred from central government to local governments over time. Perumnas and SMF are

assigned as specialized actors to spread the responsibility and cost of implementing housing

policy.

Part A: Strengthening and Empowering Local Governments

5.1 Develop a System for Local Government Accreditation Immediate

5.2 Build Capacity of Local Governments Short Term

5.3 Design Programs and Allocate Funding with Performance-Based Rewards Short Term

Part B: Developing the Building Blocks of Effective Housing Policy

5.4 Establish Minimum Housing Standards that are Flexible to Local Conditions Immediate

5.5 Invest in a Housing & Settlements Management Information Systems Immediate

5.6 Build an Effective Housing Affordability and Targeting System Immediate

5.7 Elevate the role of the Pokja as Lead Housing Reform Coordinating Body Short Term

5.8 Support the Development of Network of Real Estate Professionals Medium Term

Action 6. Mobilize Urban Land for Housing and Settlements by focusing initially on

under-utilized public land assets and regularizing informal settlements, then exploring

alternative instruments for making land available.

6.1 Develop a National Land for Housing Program to Assist Low-Cost Housing

Delivery

Immediate

6.2 Regularize Tenure for Investment in Informal Settlements Short Term

6.3 Strengthen Local Government Regulatory Systems for Land Management Short Term

6.4 Explore Alternative Strategies to Assemble Urban Land for Housing Medium Term


6. Relevant Case StudiesA. Housing Policy Reform in Morocco

International Case Study of Integrated Housing Policy

In 2002, Morocco faced a housing defi cit of 1.24 million units with 120,000 new units per year

required to meet the demands of population growth.82 The Ministry of Housing and Urban Planning

called for housing policy reform to increase the annual construction of 170,000 units to meet

demand and reduce the existing defi cit.

The next year, Morocco launched the comprehensive Villes Sans Bidonvilles program (Cities

without Slums), which involved a coordinated set of policies led by the Ministry of Finance,

Central Bank and Ministry of Human Settlements, and included a national in-situ slum upgrading

program, in combination with the empowerment of a national land and housing developer, Al

Omrane, assertive development of greenfi eld public land, tax incentives to increase private sector

participation in low-income housing construction and creation of guarantee funds to incite private

banks to offer mortgage products for Moroccans with low or irregular incomes.

This mix of both supply side and demand side interventions, summarized below, has enabled

Morocco to emerge as the most developed housing market in Africa and the Middle East. The

slum population in Morocco has decreased from 8.2 percent of the total population in 2004 to 3.9

percent in 2010, over 2 million affordable housing units have been built since 2000, there has been

a reduction in the housing defi cit by over 40%, the number of private developers building low-cost

housing has increased from a handful to over 500, and there has been a rise in the mortgage to

GDP ratio to 18 percent in 2014, with over 70 percent of households now qualifi ed to access

housing fi nance.

Key initiatives on the supply side:

The Cities Without Slums program (or “Villes Sans Bidonvilles“). This state program for the

period 2004 to 2012 was aimed at improving the living conditions of slum dwellers and offered

three alternative solutions to benefi ciaries: sale of a social housing unit, a very low cost unit,

or a low-cost serviced land plot. Most households prefer land supply, some teaming up with

other households, and yielding a part of building rights in exchange for the construction of their

homes.

Empowerment of a national land and housing developer, Al Omrane83, which is responsible

for housing PPPs and providing housing at scale by ensuring and supervising land allocation,

overall technical aspects of construction works, fi nancial follow up of projects, collecting

benefi ciary contributions, preparing sales contracts, and delivering individual property titles. Al

Omrane also prefunds eligible developers for the costs of land purchase, allowing them to pay

for the land they develop in phases.

A Social Housing Program (Launched in 2000, reformed in 2010). Social housing is defi ned as

units that sell at a maximum price of Dh 250,000 and have surface areas between 50 m2 to

82 MHU, Habitat et urbanisme 2003 – 2007, un secteur en mouvement.

83 Al Omrane was created out of the 2003 merger between ANHI, Attacharouk Company and the National Company for Development and Construction (SNEC).

145 | Annexes

80m2. By law, property developers who agree to build a minimum of 500 social housing units

over 5 years benefi t from VAT exemption and 50% of the corporate tax. The 2010 law revision

reduced the threshold for tax breaks from 1500 to 500 units (already down from 2500 when

the program fi rst began) to enable small developers to benefi t. Homebuyers must occupy the

unit for 4 years before resale.

A Very Low Income Housing Program ( or “Logements a Faibles Valeur Immobiliere Totale”

(FVIT)). FVIT units are defi ned as not exceeding a sale price of Dh 140,000 and are aimed at

households earning less than 1.5 times the minimum wage (about Dh 3000 per month).

Upgrading informal settlements. Some neighborhoods are being renovated in situ, often when

a home complies with regulations (size and quality of construction). In this case, housing has

been built without permission or adequate services, but are selected by local authorities for

formalization, particularly the appropriate land titles. Benefi ciaries contribute fi nancially to the

program.

Key initiatives on the demand side:

FOGARIM: a guarantee fund launched in 2004 and used to mobilize bank resources to fi nance

households with irregular and low incomes. FOGARIM offers a guarantee to banks for up

to 70% of the mortgage loan amount, and up to 80% of the loan for the VSB participants.

Loans can be made available up to 100% loan-to-value (80% in the case of VSB), and there

are fi xed premiums charged of between 0.33% (for LTVs less than 50%) and up to 0.65% (for

LTVs above 90%). Main eligibility criteria are housing price and repayment instalment level, an

income proxy.

FOGALOGE: a guarantee fund targeting middle income groups, public or private sector

employed or non-salaried, and non-resident Moroccans. Mortgage loans with LTV up to 100%

are eligible. The guarantee covers up to 50% of the debt, and is capped at Dh 400,000.

Repayments must not exceed 40% of incomes. Premiums range from 0.25% to 0.35%

depending on LTVs.

These funds are housed in an umbrella Fund called Damane Assakane managed by the “Caisse

Centrale de Guarantie” (CCG), a government agency.

Key Lessons for Indonesia

A high-priority and integrated strategy that address both slum alleviation and the fi nancing and

delivery of new formal housing is necessary to successfully curb the absolute number of people

living in slums and increase low-cost housing supply.

Providing the right incentives for private sector participation can have a large impact on reducing

entrance barriers and stimulating the number of real estate actors, particularly those serving lower

or middle-class households.

B. CODI Thailand

International Case Study of Slums Alleviation

One of best instances of a community-government partnership is Thailand’s Baan Mankong Upgrading Program. In 2003, the Thai Government announced an ambitious policy to address the

housing needs of the urban poor. The Baan Mankong Upgrading Program channels government


funds, infrastructure subsidies and soft housing loans directly to the poor who then jointly design and

execute improvements to their homes, environment and basic services while managing the budget

themselves. As part of this program implemented by the Community Organizations Development

Institute (CODI), a program of the Ministry of Social Development and Human Security, the poor in

200 Thai cities work in close collaboration with their local governments, universities and NGOs to

survey all urban settlements and plan an upgrading process that attempts to uplift all settlements

in that city within fi ve years. Once these city-wide plans are fi nalized, CODI channels the budget,

infrastructure subsidies and housing loans directly to communities.


Central government programs can enable community-driven development while empoweering

and increasing the capacity of local governments.

Community participation must be part of the planning, design and implementation of housing

programs.

C. Housing Development Agency, South Africa

International Case Study of Land Provision Agency

Established in 2009 through the Housing Development Agency Act of 2008, the Housing

Development Agency (HDA) is a public development agency whose mission is to accelerate the

acquisition and release of state, private and communally owned land for housing delivery and the

development of human settlements. As a government agency, the HDA is accountable through its

Board to the Minister of Human Settlements.

HDA obtains its funding from:

Proceeds from the sale of land;

Parliamentary appropriations;

Government grants; and

Fees for services rendered.

The HDA has established two main objectives to fulfi ll its mission, namely:

To identify, acquire, hold, develop, and release well-located land and buildings;

To provide project management support and housing development services.

Each of these objectives is detailed in the following two programs:

1. Land Planning and Assembly

The primary aim of this program is to design and coordinate strategies and support programs that

facilitate the release of integrated land and landed property for sustainable human settlements

development. It is structured into four areas of operation:

1. Land assembly strategy and support

2. Land geo-spatial info services

3. Knowledge and best practice services

4. Monitoring and Evaluation

147 | Annexes

One of the key initiatives of this program is to develop a national land assembly strategy, in concert

with a variety of stakeholders, including provinces and municipalities.

2. Land and Housing Support Services

This program is housed in the regional offi ces where the Land and Housing Support Services work

closely with their partners, including provincial and municipal governments, to implement support

programs and projects that promote sustainable human settlements. Program support areas may

include but are not limited to: informal settlement upgrading support, emergency housing support,

land geo-spatial services, and project technical implementation support.


Land identifi cation, release, and development is an integral aspect of affordable housing provision.

No single instrument or agency can effectively manage the complexity of land and housing

markets. Instead, a suite of options and regulatory mechanisms is required to obtain, develop and

release land for affordable housing.

D. TOKI, Turkey

International Case Study of Public Housing Developer

TOKI was established in 1984 to deliver well-planned affordable housing at scale. However, TOKI’s

low-income provision in the 1980s and 1990s often became suburbs for the middle class. Even

when the agency began making long-term soft loans to building cooperatives, the benefi ciaries

were mainly middle class.

The 2003 Emergency Action Plan for Housing and Urban Development set a 250,000 low-cost

unit target for the 5 years until the end of 2007. Regulatory amendments in 2003 and 2004

transferred a number of responsibilities on to TOKI, allowing TOKI to become a powerful actor in

the development of mass affordable housing for sale or rent to low and middle income households,

reporting directly to the Prime Minister. The Land Offi ce was closed with its land reserve and nearly

all of its authority given to TOKI, and the assets and shares of the publicly-owned real estate bank

were transferred to TOKI.

TOKI’s main role now reaches across identifi cation land areas for priority housing projects,

preparation of site master-plans, assembly of fi nancing for developments, partnerships with

municipal housing companies84 and private real estate developers and sale of units to end users.

TOKI engages private sector developers, as well as real estate investors, project managers, service

providers, contractors and trade companies through a public tender process and revenue-sharing

model and also has the power to expropriate and rezone land, providing a successful revenue

source for TOKI.

TOKI’s revenue sharing model relies upon a public tender process to generate short-term profi ts in

order to subsidize low-income housing. The minimum value of land is determined and a tender is

announced. A contractor is selected using a formula determined by the highest possible revenue

rate and income-share ratio in TOKI’s favor. The contractor takes on all responsibility for covering

the cost of fi nancing. The revenue collected from sales is allocated to TOKI’s account and used to

84 Municipal companies are private entities under the executive of municipal administration that provide housing typically through partnership with TOKI. For example, KIPTAS is a company owned by the Istanbul Metropolitan Municipality.


subsidize affordable housing projects. As of 2011, over 90 percent of TOKI’s operating revenues

were derived from the proceeds of its sales.

TOKI has been responsible for the construction of a total of 285,000 units built by the end of

2007, 500,000 by the end of 2010, and 559,840 by 2012. From 1984 to 2002, TOKI provided

credit support to 940,000 housing units through a cooperative credit structure and has provided

completion credit support to 92,215 homes and constructed 43,135 housing units on its own.

The total investment cost of this construction was TL 48 billion, involving 3,793 tenders and 2,486

construction sites. Social housing units are high-rise and generally vary in size between 80 – 120

m2 with costs kept around US$ 180 – 200 per m2. The timeline of social housing projects from

tender to opening is generally 12 to 18 months.

Although successful at increasing supply of apartments, the incentives that arise with the revenue-

sharing model results in TOKI building and selling many units to middle or high income families,

for which they can achieve higher sale prices. Secondly, as TOKI is a central agency with rezoning

ability, it has been criticized for not always coordinating adequately with city governments to

understand and integrate with local needs and spatial development plans.


A centralized housing developer agency can be effective at delivering mass affordable housing

for sale or rent to low and medium income households, partnering with government and non-

government actors through a transparent tender process.

If proper targeting, assessment of demand, or standards for housing design and settlement

planning are not put in place and adjusted to each local context, public housing projects risk

turning into middle-income neighborhoods or future slums.

E. Department of Family and Community Services (FACS), Government of New South Wales/Australia

International Case Study of Technical Support Facility

The Department of Family and Community Services (FACS) provides housing and support services

for special needs population, rental and homebuyer assistance, community regeneration services,

and development and regulation of social housing policies.

Below are FACS’ three key initiatives:

1. Center for Affordable Housing

The Center for Affordable Housing was established to educate key stakeholders (supply and

demand side), announce availability of grants and subsidies, and publish best practices in

affordable housing development. The website also provides information for potential partnerships

between stakeholders. By disseminating relevant information on its website, the Center aims to

bring together stakeholders to leverage resources in the most optimal way possible.

2. Local Government Housing Toolkit

The New South Wales Department of Housing created the Local Government Housing Toolkit to

help councils understand local housing needs and issues to formulate appropriate local responses.

149 | Annexes

The aim is to enable local governments to use their statutory powers and resources to improve

local housing needs through their role in planning, development, and construction.

The kit provides step-by-step guidelines for the development of an affordable housing strategy,

with the following three frameworks:

Analysis of local or regional housing needs and conditions;

Goals and detailed set of objectives;

Implementation Plan.

3. Land and Housing Corporation

The Land and Housing Corporation (LAHC) is a Public Trading Enterprise under the New South

Wales Ministry of Family and Community Services. It is responsible for owning and managing land,

buildings, and other assets within the social housing portfolio, with the goal of providing more

houses for people in need. LAHC’s objectives are:

To advise the government on best use of its land and housing assets to achieve social housing

outcomes;

To manage and develop land and housing assets;

To procure effective tenancy management services;

To collaborate with other government agencies to infl uence policy and implement initiatives

that relate to LAHC’s purpose and goal.

In carrying out its objectives, LAHC collaborates with government agencies and community

organizations including local councils, community housing providers, building and maintenance

contractors, and local communities.

Lessons for Indonesia

A step-by-step toolkit can help local governments develop housing solutions in accordance with

local needs.

Public enterprises can convene the various actors responsible for housing delivery in order to

create optimal solutions.

F. Homes and Communities Agency, United Kingdom

International Case Study of Technical Support Facility

The Homes and Communities Agency (HCA) is the national housing and regeneration agency

whose main business is investment in new affordable housing. Additionally, the HCA also works

to improve existing social housing and to regenerate land, and is also the regulating agency for

social housing providers in England.

The HCA strives to develop strong partnerships at national, regional and local levels. The key to

their success as a national agency is to partner with the local authorities and other key stakeholders

in the housing ecosystem such as housing associations, private-sector builders, developers and

contractors, lenders and investors, and the voluntary and community sectors.


1. Housing: The HCA has a statutory duty to improve the supply and quality of housing in England.

Activity: Get Britain Building: The HCA created a £500 million investment fund for developers to

address weaknesses in the housing market. The aim is to create homes and jobs on development

sites that have stalled, haven’t started, or are classifi ed as being on hold. So far, this program has

helped jumpstart construction on nearly 12,000 homes.

2. Enabling: HCA enabling role includes a range of services - from advice on legal agreements

and planning applications, to investment models and brokering deals, to the provision of spatial

and market intelligence.

Viability & Planning Tools: The HCA uses their practical, experience-based tools to help their

partners with a variety of technical areas relating to housing, regeneration and economic growth:

Area Wide Viability Model – Testing the viability of planning at a strategic level

Development Appraisal Tool – Appraising in detail the viability of an individual site

ATLAS Guide T10 – Financial Appraisal & Project Viability. Dealing with fi nancial viability

Planning Obligations Good Practice – Recommending best practices in housing delivery.

Expertise & Skills: HCA also depends on the skills and know-how of their partners in their success.

The HCA has developed a number of viability and planning tools85 and other resources to help

local authorities. In addition to the enabling work of their local delivery teams, their Advisory Team

for Large Applications (ATLAS) uses planning expertise86 to provide direct specialist support to

HCA’s partners to help them deliver strategic projects through the planning system.

Research & Best Practice: The HCA places a premium on insight and intelligence to ensure

that their activity meets the needs of the places and communities where they work, and that

their decisions about where and how to intervene are underpinned by sound analysis. They are

also committed to sharing their fi ndings with their partners, and developing best practice and

guidance87 documents based on these fi ndings. They also publish regular information and analysis

such as their monthly housing market bulletin88.

HCA’s research function delivers:

Strategy and program development based on analytical evidence and support

New thinking to support innovation to respond to new challenges

Monitoring and evaluating the impact of HCA programs

Best Practice and Guidance: The HCA has published or worked with their partners on a number

of documents to help local authorities and other partners to maximize delivery in their areas.

They also have a library of external guidance and research that may be of use, available through

downloads and synopses.

85 Refer to: http://www.homesandcommunities.co.uk/ourwork/viability-and-planning-tools

86 Refer to: http://www.homesandcommunities.co.uk/ourwork/planning-expertise

87 Refer to: http://www.homesandcommunities.co.uk/ourwork/best-practice-and-guidance

88 Refer to: http://www.homesandcommunities.co.uk/ourwork/market-context

151 | Annexes

3. Land and regeneration: The HCA plays a key role in land, regeneration and local economic

development. During 2011, the HCA’s land holding were increased by the transfer in of

approximately 1,000 ha of coalfi elds sites and over 2,000 ha of other economic assets from the

Regional Development Agencies.

The HCA is also supporting large land, property and commercial projects with potential for

growth through the Local Infrastructure Fund89. This could include land remediation or reclaiming

contaminated land, upgrading or installing utilities, linking to local road networks or reconfi guring

site layouts. The HCA also works with other public sector land owners to promote the release of

public sector land for development.


National agencies can use their experience, tools and relationships with housing development

actors to help local authorities meet their housing needs.

National agencies can receive and consolidate land holdings and other existing public assets.

G. Department of Human Settlements, South Africa

International Case Study of LG Accreditation

Operated under the Department of Human Settlements, the Comprehensive Plan for Sustainable

Human Settlements envisages that municipalities will play a substantial role in the delivery of

sustainable human settlements. The key thrust of the Plan is to have all three levels of government

(central, provincial and local) work together with the cooperation of the private sector, as well

as the promotion of a developmental local government that effi ciently responds to the needs of

citizens.

Through an accreditation process, the Department of Human Settlements (DHS) will progressively

devolve and assign defi ned functions pertaining to the administration of housing programs to the

municipalities. Such accreditation will be structured to enable accelerated delivery on important

housing priorities in local areas.

Given that the capacity of municipalities differs, there are three levels of accreditation, which outline

incremental responsibilities of accredited local governments:

Level 1: Benefi ciary management, subsidy budget planning and allocation, and priority program

management and administration (delegated functions);

Level 2: Full management and administration of all housing programs;

Level 3: Financial administration (inclusive of program management and administration).

Municipalities seeking accreditation must go through a rigorous, multi-step accreditation

process that includes different eligibility criteria for each level. The DHS established some priority

municipalities including, but not limited to: Cape Town, Johannesburg, Buffalo City, and Mangaung.

89 Refer to: http://www.homesandcommunities.co.uk/ourwork/local-infrastructure-fund


City governments will set up a National Housing Program offi ce that will implement the new

processes received through accreditation. Provincial governments will be intermediaries between

the local and national governments, and their (new) roles will include: (i) capacity development

and support for municipalities; (ii) monitoring and oversight; and (iii) setting up accreditation units.

Moreover, provincial governments will retain the authority to distribute funding to municipalities.

The end goal of the accreditation and devolution is to improve the abilities of municipalities

in integrated urban management and planning; response to housing demand in cities; and

acceleration of housing development and household quality improvement.


An accreditation process is necessary when the responsibility for administering housing programs

is devolved to local governments.

Accreditation processes should be rigorous and tiered in order to match responsibilities to

capabilities

H. Real Estate Information Center (REIC) - Thailand

International Example of Housing Management Information Systems (MIS)

Established in 2004 as a resolution by the Thai Cabinet, the REIC is a part of the Government

Housing Bank though directed by its independent Board of Directors. The REIC missions are to

(1) become the Real Estate Industry’s consultant center and knowledge base, (2) develop housing

and real estate research, analysis and forecasting capabilities, (3) build tools and indicators that

reliably forecast the Thai property market’s demand, supply and price levels and (4) disseminate

relevant real estate information to both the public and private sectors.

The REIC is funded primarily by the Thai Ministry of Finance (through the Government Housing

Bank), although over the last several years, about 10% of its budget has come from fees derived

from services it provides to the private sector.

The REIC collects data from three key sources:

1. Government Ministries (Department of Land, Bank of Thailand (Central Bank), Ministry of Public

Works, Ministry of Urban Planning, Bangkok Metro Public Company Ltd., National Statistics

Offi ce, National Housing Development Board, Legal Execution Department for foreclosure

data);

2. Primary housing starts and housing completion data from key developers;

3. Quarterly consumer survey conducted across the 77 provinces outsourced by external research

agencies.

The REIC publishes a real estate annual report that includes data relating to home sales, housing

starts, land allotment permits, building permits, housing transfers, housing completions, housing

mortgages, a housing developer sentiment index and a condominium price index.

153 | Annexes


Government can develop the information systems necessary for monitoring market dynamics and

informing policy decisions.

Consolidating and analyzing data from government ministries as well as developers and consumers

enables government to build tools and indicators that can reliably forecast housing needs.

I. Housing Microfi nance in Tanzania

International Case Study of Housing Microfi nance Sector Development

As with most developing countries, Tanzania has large unmet demand for housing microfi nance.

Mortgage products are usually only available for wealthy households and there are limited fi nancing

sources for incremental housing improvements.

In Tanzania, a number of fi nancial institutions have recently started developing and promoting

housing microfi nance, partly with the support of multilateral institutions, such as the World Bank,

as well as international NGOs.

In November 2009, a housing microfi nance working group was established with representatives

of a number of institutions that are interested in fostering the development of the HMF market in

Tanzania. This group included representatives from the Central Bank of Tanzania, the Centre for

Community Initiatives (CCI), Habitat for Humanity Tanzania, the Tanzania Gatsby Trust (TGT) and

WAT Human Settlements Trust. Activities include a market study report, published by Bank of

Tanzania, on the HMF opportunities in the country.

A three-year pilot program aimed at establishing a sustainable business model for providing

housing microfi nance for low-income earners was undertaken from 2009 until 2012, led by WAT

in collaboration with SACCOS (Savings and Credit Cooperative Society), with funding and support

from Rooftops Canada and the Norwegian Federation of Housing Cooperatives. The goal was to

start with pilot savings and credit institutions in order to develop sustainable and replicable loan

products and processes, that were suitable for low and middle income Tanzanian communities

and eventually to extend throughout a network of over 4,000 SACCOs.

The three-year pilot program consisted of:

A loan guarantee fund to mitigate fi nancial risks and stimulate interest for the investment of

commercial capital into HMF.

Provision of technical assistance for loan product development and ongoing assessment of the

WAT SACCOS.

Financially subsidizing operational costs during the period of scaling up.

Conducting research and analysis to support the program and training materials for the broader

sector.


At completion of the pilot phase of the project in 2012, 753 loans, worth a total of Tshs. 786,164,000

(US$485,000) had been disbursed for home improvement and WAT is now extending its program

to continue to support the development of the HMF sector.

Rooftops Canada, and Habitat for Humanity have also been running a pilot program for housing

microfi nance in Tanzania, called Makazi Bora (‘Improved Housing’), in which they work directly

with interested MFIs and support them in HMF product development and training of loan offi cers.

Once the HMF product has been successfully piloted, these MFIs are eligible to access low-cost

fi nance via a housing microfi nance fund, MicroBuild, to assist the scaling of HMF loans to a larger

number of customers.

In 2010, the Bank of Tanzania’s housing fi nance initiative (supported by USD 40 million provided

by the World Bank) included an explicit HMF component, in line with a similar project with Bank of

Nigeria. The HMF component was allocated USD 5 million or 12.5% of the total program costs.

The project intended to undertake advisory on regulatory reform and capacity building required

to foster a safe lending environment for housing microfi nance in its fi rst phase, working towards

the establishment of a USD 3 million Housing Microfi nance Fund to provide MFIs with access to

long-term funding for micro-housing loans in Phase 2 of the program.

Yet, progress has been slow. The number of HMF loans increased to 1091 in December 2014 with

7 participating credit institutions, from a baseline of 462 and 4 institutions in March 2010, and the

establishment of the Fund has been delayed, pending fi nalization of the terms and conditions for

eligible fi nancial institutions.


International studies indicate substantial unmet demand for housing microfi nance in emerging

economies, particularly where incremental housing is the main mode of housing production.

Development of the HMF sector takes time, and fi rst requires investment in sector studies as

well as trainings and standardized materials for fi nancial institutions to build awareness of the

opportunities and support interested MFIs in HMF product development, before funding may

become an issue.

J. Ministry of Housing and Urbanism, Chile

International Case Study of Down Payment Subsidies

The Chilean housing system is based on public-private synergies and relies heavily on the provision

of down payment vouchers by the government. The system has proven highly successful by most

standards. In 1990 one out of every four houses was overcrowded or extremely overcrowded,

while in 2006 only one out of every 10 houses was measured as overcrowded. In 2006 the housing

defi cit stood at 410,000 units, a small number considering that each year the public housing

system provides around 100,000 units. In terms of stability, the system successfully coped with

the international fi nancial crisis of 2007-2008.

There are two main down payment subsidy programs in Chile and they target different groups.

Eligibility is determined by income. Since the 2000s the “Housing Solidarity Fund” has enabled poor

families to buy or build a house for up to USD 23,000 without a complementing mortgage loan.

Essentially, the government provides a down payment voucher for basic housing in combination

155 | Annexes

with a small contribution from family savings. Bankable households operate under the “General

Housing Subsidy System.” The standard fi nancial package under this program includes three

ingredients: a voucher applicable to a down payment, a contribution from family savings, and a

long-term mortgage with a maximum payment-to-income ratio of 25 percent to cover the bulk of

the cost of the dwelling.

The program has effective targeting mechanisms. The use of the down payment subsidy is in itself

a mechanism to decrease capture by higher income households since it prevents the regressive

qualities inherent in below-market interest rates. The Chilean government initially used “Social

Assistance Committees” to assess and qualify benefi ciaries. In 2008 they introduced the “Social

Protection Form,” which took over this role and functions similarly. The form ascertains “vulnerability”

and is administered by social workers working for municipal governments. Information for the

whole country is kept in a database in the Ministry of Planning.

In addition to these targeting mechanisms, the amount of subsidy is based on the home price,

which is capped at USD 23,000 and varies by geography. There are also signifi cant tax benefi ts

for homeownership. Homes with an area of less than 140 m2 are exempt from payment of half

the land tax for a period of 10 to 20 years. In addition, income earned from renting a house is not

classifi ed as taxable income under the revenue tax law. Finally, since 1998 buyers of new homes

have been able to deduct the payment of interest on mortgage loans from their annual taxable

income. On the supply side, the voucher is paired with tax breaks that encourage the construction

and purchase of new housing.

The subsidy is administered and delivered through the Ministry of Housing and Urban Development

and, for bankable households, it is recommended that the subsidy be combined with mortgage

fi nancing from a private institution. However, in recent years most commercial banks have not

provided credit through this scheme. Only Chile’s national bank, Banco Estado, has taken a key

role in this market. This has occurred even though Banco Estado is already highly exposed to

low-income mortgage loans, owning around 75 percent of credit originated in private vouchers.

Though the reluctance of most fi nancial organization to lend to bankable households as part of the

scheme is a concern, the program has run quite smoothly and helped reduce Chile’s quantitative

and qualitative housing defi cit


Down payment subsidies can help improve accessibility and affordability of mortgage fi nance for

low-income citizens,

Upfront subsidies are less regressive than interest rate subsidies; however, good targeting and

administration measures must be in place for such systems to work well.

K. Linkage Fees - Boston, USA

International Example of Developer Contributions

Linkage fees are an example of a method that local governments use to boost the supply of

affordable housing. In the United States, linkage fees are levied in some states (Massachusetts,

New Jersey, and California) on nonresidential and market-rate multifamily residential projects, with


the aim to socialize private development and spread the benefi ts of construction through the city.

Boston’s linkage program requires that developers of large-scale commercial, retail, hotel, or

institutional structures seeking zoning relief make payments into a fund (called the Neighborhood

Housing Trust) administered by the City of Boston. The City uses the trust proceeds for the

construction and rehabilitation of low- and moderate-income housing. The regulation was

expanded in 1986 to allow for increased payments by developers, which were to be used for job

training programs for city residents.

The impetus for the linkage program was the ever-decreasing availability of affordable housing

caused by economic and job growth in Boston. At the same time, a combination of decreasing

federal aid and limited revenue from property taxes in the city meant that linkage payments was

one of the ways Boston could provide adequate housing and job training for low income residents.

Moreover, the statute provides that the linkage fees can be raised based on a combined consumer

price index but not more frequently than at 3-year intervals.

Developments in downtown Boston are required to pay the linkage fees on a 7-year schedule,

while developments in other neighborhoods pay on a 12-year schedule, usually at the time of

issuance of a building permit. The extended payment period adds an element of fl exibility that

has facilitated the progress of development in diffi cult circumstances. Deferred payments from the

7- to 12-year schedule allows developers to pay linkage fees out of operating revenues from the

project rather than from “up front” equity investment, reducing the fi nancing necessary to begin

construction. It is important to note that this deferral does diminish the Net Present Value (NPV)

of the fee.

Scheduled payments have also helped assure a steady infl ow of funds to the Neighborhood

Housing Trust (NHT), even over periods of low development activity, such as the recession in the

late 2000’s. As of 2006, the Neighborhood Housing Trust (NHT) had awarded $87 million to 120

different projects throughout the city, which had contributed to the creation of ~8000 housing

units of which ~6000 were affordable.


Local governments in active real estate markets should leverage their position in order gain

concessions from developers.

Spatial regulations, such as a mechanism for zoning restrictions and bonuses, can generate

private sector funding for affordable housing.

157 | Annexes

7. Selected Reference Documents

1. Asian Development Bank. Housing and Housing Finance—A Review of the Links to Economic

Development and Poverty Reduction. 2013.

2. Colombijn, F. Public housing in post-colonial Indonesia. The revolution of rising expectations.

2011.

3. Devisari, T and Peresthu, A. Self-help housing in Indonesia: The only option for the poor?

2010.

4. DFID. Jakarta City and Metropolitan Region: A Contextual Overview. 2000.

5. Firman, T. B. Major Issue in Indonesia’s Urban Land Development. 2004.

6. Heryani, E and Grant, C. Land Administration in Indonesia. Conference Paper. 2004.

7. Hoek-Smit, M.C. Technical Assistance for Policy Development for Enabling the Housing

Market to Work in Indonesia. HOMI Project. 2001.

8. Hoek-Smit, M.C. The Housing Finance Sector in Indonesia. 2005.

9. Hudalah, D. State of Low Income Housing Policy and Finance. Land Policy and Markets.

March 2011.

10. International Finance Corporation & PT Holcim. Indonesia Micro Housing Finance Survey.

2012.

11. Ministry of Housing, Republic of Indonesia. Housing Finance Policies and Programs in

Indonesia. 2012.

12. Monkonnen, P. Urban Land-use Regulations and Housing Markets in Developing Countries:

Evidence from Indonesia on the Importance of Enforcement. 2013.

13. Nurdini A. and Harun, I.B. Incorporating User for Rental Housing Design Case Study: City of

Bandung, Indonesia. 2010.

14. Nurbaity, A.M. and Hasbullah, A. Housing Policy for the Poor in Malaysia and Indonesia.

2011.

15. Peppercorn, I. Public Rental Housing in the United States – Lessons for Indonesia.

16. UN-HABITAT. Housing Finance Mechanisms in Indonesia. 2008.

17. Rolnick, R. Report of the Special Rapporteur on Adequate Housing. High Commission for

Human Rights (OHCHR). 2013.

18. Widyoko, Good Governance and Provision of Affordable Housing in DKI Jakarta. Case Study.

2007. August, 2012.

19. World Bank. Land Consolidation. A Review of Policy and Implementation Procedures in

Indonesia. May, 1999.

20. World Bank. HOMI – Housing Market Indonesia. 2002.

21. World Bank. Housing Finance in Emerging Markets. 2009.

22. World Bank. Housing in Indonesia: Expanding Access, Improving Effi ciency. Report. 2012.


23. World Bank. Indonesia Housing Policy: Key Strategic Issues. Technical Note. July 2013.

24. World Bank. Indonesia: State of Low Income Housing Policy and Finance. 2011

25. World Bank. Protecting Vulnerable Households in Indonesia. 2012.

26. World Bank. Towards Indonesian Land Reforms: Challenges and Opportunities. A Review of

the Land Sector (Forest and Non-Forest) in Indonesia. 2014.

Websites:

1. Bappenas: http://www.bappenas.go.id/

2. Bank BTN: http://www.btn.co.id/

3. BPN: http://www.bpn.go.id/

4. BPS: http://www.bps.go.id/

5. Coordinating Ministry for Economic Affairs: http://www.ekon.go.id/

6. Indonesia Database for Policy and Economic Research: http://data.worldbank.org/data-

catalog/indonesia-database-for-policy-and-economic-research

7. Ministry of Housing: http://www.kemenpera.go.id/

8. Ministry of Public Works: http://www.pu.go.id/

9. Ministry of Social Affairs: http://www.kemsos.go.id/

10. Perumnas: http://perumnas.co.id/

11. SMF: http://www.smf-indonesia.co.id/

12. TNP2K: http://www.tnp2k.go.id/

159 | Annexes

8. Glossary of Terms

ALM Asset-liability management

APERSI Developers Association of Housing and Settlement

APR Annual percentage rate

ARM Adjustable-rate mortgage

Askrindo/Jamkrindo Public mortgage guarantee providers

BLU Badan Layanan Umum. Public Service Agency.

BOI Bank of Indonesia

BPN National Land Agency

BTN State Savings Bank Limited

BUDP Bandung Urban Development Program

CG Central Government

DAK Special purpose grants for LGs.

DAU General allocation grants for LGs

DTI Debt-to-income ratio

FLPP Subsidized mortgage liquidity fund by MOH

FRM Fixed-rate mortgage

FSAP Financial Sector Assessment Program

GOI Government of Indonesia

HF Housing fi nance

HGB Hak Guna Bangunan. Building Rights Title.

HM Hak Milik. Freehold Title.

HOA Homeowners’ Association

HP Hak Pakai. Right to Use of Land.

HPA Housing price appreciation

HPL Hak Pengelolaan. Right of Management.

HREIC Housing and Real Estate Information Center

IDR Indonesia Rupiah

IT Information technology

IUIDP Integrated Urban Infrastructure Development Program

KIP Kampung Improvement Project

Landed House A stand-alone house with a small land plot


LG Local Government

LTV Loan-to-value ratio

MFA Multi-family apartment building

MI Mortgage Insurance (lender credit risk coverage)

MIIP Market Infrastructure Improvement Program

MOF Ministry of Finance

MOH Ministry of Housing

MPW Ministry of Public Works

MPWH Ministry of Public Works and Public Housing

MSOE Ministry of State Owned Enterprises

NBFI Nonbank fi nancial institution

NPL Nonperforming loans

OKJ Financial Regulatory Commission

PT Perumnas Housing Developer (State-Owned Enterprise)

POKJA PKP Inter-Ministerial Working Group

PPPSRS Perhimpunan Pemilik dan Penghuni Sarusun. Tenants’ Association.

PSO Public Service Obligation

REI Real Estate Indonesia

REIT Real estate investment trust

RMBS Residential mortgage-backed securities

RP3KP Rencana Pembangunan dan Pengembangan Perumahan dan

Kawasan Permukiman. Strategic Plan for Housing.

Rusun Multi-family housing.

SKBG Sertifi kat Kepemilikan Bangunan Gedung Sarusun. Certifi cate of

Apartment Ownership.

SMF Indonesia Secondary Mortgage Corporation

SOP Standard Operating Procedures

TA Technical Assistance

TNP2K The National Team for Acceleration of Poverty Reduction

USD United States Dollar

Waqaf Donated religious land for public purpose, held in trust.

WBG World Bank Group

Yoy Year-on-year