Market Approach to Accelerate the Implementation of Flat Development Obligation

April 1, 2022

Opinion - published in Bisnis Indonesia

The central government's target to provide access to 70 percent decent housing by 2024 requires innovative policies with an unconventional approach. There are at least two ways that the government can take if the target number of housing provision has been determined.

First, from the beginning, making the provision of housing an attractive market for developers. The government provides incentives for developers who participate in providing affordable housing. Second, incorporate developer obligations.

Markets and incentives

The incentive can be in the form of additional floor area that can be built from the Building Floor Coefficient and Basic Building Coefficient. The additional floor area can then be used for other projects. Not only does it not burden the DKI Jakarta government because it is not a fiscal incentive, the Jakarta government actually benefits. Incentives in the form of additional space intensity are attractive and the government can be flooded with applications from developers who want to voluntarily participate in the market for providing affordable housing.

Once incentivized, developers will strive to make affordable housing projects attractive to buyers. Since all the process is taken care of by the developer from start to finish including sales, they will pay attention to the location of the development, the public transportation network around the development site, and other public facilities.

Incorporate developer obligations

Second, the government can incorporate the obligations of developers. In Jakarta, the obligation mandated by Law No. 20/2011 on Flats is translated by building 20 percent of public flats from the commercial land area.

If we still use the current policy, then the flats that are built only fulfill obligations. The scale of the flats is not massive, the majority are located far from the city center, and are not attractive. Combining the implementation of the obligation to build flats is also more effective and efficient.

The policy to merge developer obligations also has several advantages. First, the merger creates a "market" for developers who have the competence of public flats. This is because developers who have obligations are almost certainly large developers with a core business that is not public flats.

The developers who have the obligation must relearn to be able to build public flats whose specifications are determined by the DKI Jakarta Government. Forcing the implementation of the obligation of public flats without the help of a market approach means a slower process. The construction price of the units is also more expensive due to the smaller scale of development and unattractive locations.

The second advantage is the more effective and efficient implementation of the obligation to build flats. The development worked on by developers specializing in flats has resulted in improvements on various sides. For example, more careful planning.

Merging obligations also allows for larger-scale development because the obligations can come from a combination of several developers at once. Simply put, the provision of affordable housing from a "retail" scale turns into a "wholesale" scale.

The two advantages of the market approach policy can make the developer's debt obligations be paid off immediately. As of August 2021, the Supreme Audit Agency (BPK) noted that the DKI Jakarta Government had receivables in the form of apartment construction.

Good start

The good news is that the issuance of Government Regulation Number 12 of 2021 concerning the Implementation of Housing and Settlement Areas allows a market approach to be applied in implementing developer obligations. In the regulation, developers can convert housing development obligations into cash funds managed by the government.

Government Regulation No. 12 allows for more flexible application of housing provision principles. The regulation can be the beginning of the creation of a market mechanism for housing provision.

The DKI Jakarta government can benefit from the issuance of Government Regulation No. 12. Liability receivables from developers that have been delayed can be resolved immediately. In addition, this new regulation is a further driver of the need for the DKI Jakarta Government to respond to Government Regulation No. 12 and form a regional public service agency as its implementer so that affordable housing can be accessed by more Jakarta residents.

A series of benefits will certainly be felt by Jakarta residents if this 'idle money' in the form of obligations can be executed with a market approach. The problem lies in execution. In fact, the provision of housing is an urgent need and the 'idle money' is the capital. This is because the market approach is the catalyst for more affordable housing, better public facilities, more reliable public transportation, and better public parks.

A market-oriented policy response from the DKI Jakarta Government is needed because over-reliance on command-and-control policies like the current one causes the implementation of noble goals to be ineffective. The policy direction in the future is no longer just requiring the construction of flats, but needs to accompany the policy with other more flexible instruments, namely policies with a market approach.

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