International Property Markets Scorecard. Indonesia Market Conditions Desktop Survey July 2014

Transcription

1 International Property Markets Scorecard Indonesia Market Conditions Desktop Survey July 2014

2 Contents Scorecard Background & Information... 3 Scorecard Methodology Property Rights Legal Protection Registries Formal Ownership In-Country Assessment Information... Error! Bookmark not defined. 2. Access to Credit Banks Other Sources Credit Bureau In-Country Assessment Information... Error! Bookmark not defined. 3. Effective Governance Democratic Representation Lack of Corruption Efficient Administration In-Country Assessment Information... Error! Bookmark not defined. 4. Rational Dispute Resolution Rule of Law Commercial Dispute Resolution In-Country Assessment... Error! Bookmark not defined. 5. Financial Transparency Market Stability Independent Asset Valuers Data Standards In-Country Assessment... Error! Bookmark not defined. 6. Appropriate Regulation Fair Tax Regime Professional Services Capital Markets In-Country Assessment... Error! Bookmark not defined. 2 I nternational Property Markets Scorecard China 2011

3 Scorecard Background & Information The Scorecard reflects the status of the six Core Elements necessary for transparent and efficient property market development. Each Core Element includes three Lead Indicators that are further divided into Sub-Indicators. Colors signify the strength of institutions that support market development very strong, strong and weak. No color indicates that institutions are very weak. Gray indicates more information is needed for an objective determination. Acknowledgement The International Property Markets Scorecard Project is the latest development in the continued cooperative work between the Center for International Private Enterprise (CIPE) and the International Real Property Foundation (IRPF). The Scorecard derives from the work of an academic panel led by Richard Green, PhD., Director of the University of California s Lusk Center for Real Estate and the University of Denver, Burns School of Real Estate and Construction Management s Global Real Estate Project under the direction of Dr. Mark Lee Levine. For Education Purposes Only While great care has been taken to provide accurate and current information, neither the Center for International Private Enterprise, the International Real Property Foundation nor its editors, staff or contractors assume responsibility for the accuracy of the data contained herein. Further, the general principles and conclusions presented in the text are subject to significant market fluctuations over time as well as local, state, and federal laws and regulations, court cases, and any revisions of the same. This publication is distributed for education purposes with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. Copyright 2014 by the Center for International Private Enterprise and the International Real Property Foundation This work can be licensed under the Creative Commons Attribution Noncommercial Share Alike 3.0 United States License. To view a copy of this license, visit or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA. 3 I nternational Property Markets Scorecard China 2011

4 Scorecard Methodology The International Property Markets Scorecard Methodology is a systems analysis tool to measure the strength of institutional support for transparent, rational and effective property markets. It provides stakeholders with a visual representation of the status of the core elements necessary for sustainable property markets that help to distribute power and economic opportunity. Quantitative and qualitative measures are taken from established international economic development organizations and paired with on-the-ground assessments of market participants. The purpose of the Scorecard is to bring about an awareness of the interconnections between the microeconomic factors necessary for development and provide advocates, policymakers, and development groups with clear, actionable goals for continuous improvement. Property markets are inherently local and can vary widely from one city to another, even from one block to the next. The Scorecard is meant to measure how policy decisions and levels of implementation affect property markets. It is not meant to provide specific guidance, measures or predictions of individual property performance and is only completely valid in the cities where field assessments have occurred. 4 I nternational Property Markets Scorecard China 2011

5 1. Property Rights Goal Property rights that are legally protected, secure, recorded in a single, accurate, widely accessible electronic registry and that lead to high levels of formal ownership for all citizens 5 I nternational Property Markets Scorecard China 2011

6 1.1 Legal Protection (Weak) Core Question: Does an effective and sufficient legal framework exist to protect property rights for all citizens? Legal Framework (Weak) No. Even though Indonesia s Agrarian Law allows the population important land titles such as right to ownership, right to use, right to build, etc. the nature of use and duration is closely monitored by the Government. Property rights are therefore weakly protected and dispute resolution in court is highly inefficient. While corruption can be excessive, the judiciary is influenced by other parts of the government and expropriation is possible Are property rights clearly defined and protected by law? No. Ranked 79 out of 148 countries; Score 4.0 out of 7 Trend Security of Tenure (Strong) Can citizens challenge the legality of government takings? Yes. Ranked 50 out of 148 countries; Score 3.7 out of 7; Trend Source: Global Competitiveness Report World Economic Forum Bundle of Rights (Weak) Survey Question SQ1 What is the bundle of rights (group of rights such as occupancy, use and the right to sell or lease) associated with both residential and commercial property ownership? Article 33.3 of the Constitution and UUPA Article 2.1 gives the state control over earth water and airspace. Earth includes everything below the surface of land and water: Article 1.4 and 5. The jurisprudential theory of land law (UUPA 4/1960 with Articles 1-15), however delegates land control through hak or rights to individuals and entities. General land status can be divided into two groups - state land and private land. Private land is land with a certain right on it, either registered or not (yet). The formal structure is through registration of land under the UUPA. There are two subcategories of state land; (1) state land 6 I nternational Property Markets Scorecard China 2011

7 the right on which has been designated to person or a legal entity and (2) free state land or state land without any right attached to it. Since Buildings are not legally part of the land and land ownership is individual and not commercial, there has to be an individual title for commercial buildings. Civil law authorizes a separate tenure whereby one person s building can occur on another s land. There are currently five types of basic tenure with Hak Milik, the highest and nearest to freehold tenure. These are: Hak Milik Right to Ownership, Hak Guna Usaha Right of Exploitation, Hak Guna Bangunan (HGB) Right to Build, Hak Sewa Bangunan - Right to Rent, and Hak Pakai - Right to Use. Twothirds of land in forest administration in Indonesia is without titles - This problem is recognized in all analyses of land issues in Indonesia. Source: Land Administration System in Indonesia, Asean Valuers Association (AVA) Registries (Weak) Core Question: Does a reliable property registry exist including cadastral, title and mortgage lien information? No. Since Indonesia, under Agrarian Law, sees land as its most valuable resource, the government and National Land Agency are dedicated to develop and manage the land for the welfare of the people. Therefore cadastral information offices and databases have been put in place, however lack necessary technology and man-power to keep up with demand. Zoning classifications and rules have been conducted while GPS mapping is available to help resolve conflicts. However, long processes of title registry, no absolute title guarantee from the state and uncommon practices of title insurances in Indonesia make property registry unreliable Cadastral Information (Strong) Survey Questions SQ 2 Is cadastral information (information about the dimensions and location of land parcels) accessible to the public? Yes, as an agrarian country, a land-based economy has given significant contribution to the prosperity of the society. Therefore, the government gives serious attention to land 7 I nternational Property Markets Scorecard China 2011

8 development and management through the Badan Pertanahan Nasional (The National Land Agency - BPN) of Republic Indonesia, which has a mandate to develop and manage the land for the welfare of the people. BPN ( has local offices that conduct the process of updating and maintaining cadastral data for the public with support from central and provincial offices. However, these are at nascent stages with limited data storage, human resources, technology, maintenance and security. Improvements are needed for new data to be accepted and information to be accurate and up to date. SQ 3 Is zoning/permitted use information included and are regulations respected and enforced? Yes, there are currently over 20 different types of zoning designations for land in Indonesia. The most relevant include: (1) Tanah Pertanian agricultural zone, further subdivided as (a) Greenbelt - a strict no-build zone (b) Lahan Basah a wetland agricultural zone; (2) Yellow Zone agricultural zone that can sometimes be converted for residential use; (3) Teba - Forest land, usually has no restrictions for conversion to residential use, unless it is situated in any of the following areas: close to holy areas, temples, beaches, rivers or high risk locations such as cliffs; (4) Kawasan Perumahan residential zone. SQ 4 Are Geographic Information Systems (GIS) including Global Positioning Satellite (GPS) information used to create and update the registry? GIS/GPS mapping is recently available in Indonesia but still in early stages and mostly through private consulting companies. LeadDog Consulting offers all areas of Indonesia. As Indonesia has seen one of the highest deforestation rates in the world (much due to the expansion of palm oil), thus making it important for technology to create digital maps that have helped communities advocate land rights. GIS helps the public resolve boundary issues and land conflicts with the government as well as land developers. Thus it levels the playing field for local communities by allowing them to share data and improve the accuracy of government maps. Source: Faculty of Geo-Information Science and Earth Observation University of Twente The Workflow of Maintenance of Cadastral Data based on Land Administration Domain Model (LADM) A Case Study In Indonesia ed_on_land_administration_domain_model_ladm_-a_case_study_in_indonesia Alam Santi Design Indonesia Zoning Lead Dog Consulting 8 I nternational Property Markets Scorecard China 2011

9 1.2.2 Title Registry (Weak) Ranked 101 out of 189 countries; Trend What is the number of procedures required to register the transfer of a property from one owner to another? What is the duration of time in calendar days that it would take to complete the transfer? 22 days What is the total cost of the transfer including all fees, taxes, etc. expressed as a percentage of the value of the property? 10.9% value of property Source Doing Business 2013 Registering Property, World Bank Mortgage Registry (Weak) Survey Questions SQ 5 The mandatory use of notaries or similar officials slows down and adds cost to the process. Does a notary need to be involved in the registration process? Yes, On 20 December 2013, the Indonesian House of Representatives passed an amendment to Law No. 30 of 2004 on Notaries. Notaries play a key function in Indonesian civil law. As a matter of formal validity, many Indonesian documents are required by legislation to be made by notarial deed on pain of nullity. By way of example, fiduciary security is required to be created by notarial deed under the Fiduciary Security Law. A share pledge is not required to be made by way of notarial deed, but is customarily done so. SQ 6 Is information in the registry available electronically? Yes, Registration can now be made online, resulting in a faster process in the issuance of the Certificate (one to three days compared with previously, one week to one month) 9 I nternational Property Markets Scorecard China 2011

10 SQ 7 Title insurance is indemnity insurance against financial loss from defects in title and from the invalidity or unenforceability of mortgage liens. Is title insurance available to lenders? No, there is no absolute title guarantee from the state. A land title certificate is the strongest evidence of land ownership, unless proven otherwise. Land ownership under a land title certificate held in good faith by the owner for five years from its issue cannot generally be claimed by a third party on the basis of the certificate being invalid. Title insurance is uncommon and not generally made available by insurance providers in Indonesia. Source: Corporate Real Estate Multi-jurisdictional Guide: Commercial Real Estate Law in Indonesia: Overview. Country Q&A with Nafis Adwani Formal Ownership (Strong) Core Question: Do citizens understand and trust property rights institutions and avoid the informal sector? Yes. Due to strong land ownership rights under the Basic Agrarian Law Act, formal home ownership in Indonesia is robust and apparent. However, informal firms are very active in the market, which causes a problem for service firms. Survey Questions Land (Strong) SQ 8 What is the status of land ownership? Land ownership under UUPA (Basic Agrarian Law Act) Law Number 5 of 1960 regulates all land and gives Indonesians the right to several land titles, which are issued by the National Land Board (BPN). Article 1/3 UUPA states that the connection between the Indonesian People and "the land, seas, airspace and its contained wealth" is eternal in nature, and that there is no power or authority that can break or erase this connection. Article 1/2 states that the lands and seas that comprise Indonesia constitutes a "treasure" given to the Indonesian People by the Supreme God. Therefore, land ownership of foreigners or foreign legal entities is only possible under very special circumstances. 10 I nternational Property Markets Scorecard China 2011

11 Source: UUPA Act No. 5 of 1960 (English Translation) Home Ownership (Very Strong) SQ 9 What is the percentage of formal home ownership? 77% are estimated to have formal home ownership in Indonesia as of 2007 Source: U.N. Habitat Urban Indicators Website Informal Sector (Very Weak) What is the percentage of services firms that report competing with unregistered or informal firms? 65.1% of service firms report competing against unregistered or informal firms. Data recorded from Source: Enterprise Surveys, International Finance Corporation 11 I nternational Property Markets Scorecard China 2011

12 2. Access to Credit Goal An efficient, transparent financial sector that provides a broad range of citizens with access to multiple forms of competitive credit so that they can start businesses, build wealth, and purchase property 12 I nternational Property Markets Scorecard China 2011

13 2.1 Banks (Strong) Core Question: Are traditional banking services robust and extensive enough to serve the needs of the population to help them build wealth and purchase property? Access (Very Strong) Yes. The banking industry has developed nicely in Indonesia with businesses being able to obtain loans easily from robust and continuously improving banks. Mircolending institutions are also in place to increase banking and loan services to the poor How easy is it to obtain a bank loan? Ranked 16 out of 148; Score 3.8 out of 7; Trend = Soundness (Strong) How sound are the country s banks? Ranking 70 out of 148; Score 5.0 out of 7, Trend Source: The Global Competitiveness Report , World Economic Forum Microlending (Strong) The majority of microlending institutions are rated 4 out of 5 diamonds Microfinance allows citizens without traditional creditworthiness to build a credit history. How many microfinance institutions are operating in the country? 78 microlending institutions exist in Indonesia including government/nongovernment banks, local credit unions, microcredit companies and fund associations with international network affiliations. Indonesia was one of the first nations in Asia to develop commercial microfinance. With regulated financial institutions delivering most of the volume of microfinance services throughout the country, various aspects of People s credit banks or BPRs materialized more than a century ago. Microcredit is described as a loan below Rp.50 million (US$5,373) by Indonesia s central bank. 13 I nternational Property Markets Scorecard China 2011

14 What is the number of active borrowers per institution? Bina Artha: 80,917; MBK Ventura: 369,738; KOMIDA: 68,278; Dian Mandiri: 44, 276; TLM: 32,407 Source: Microfinance Information Exchange Other Sources (Very Strong) Core Question: Are entrepreneurs free to raise capital outside the banking system including venture capital and/or by issuing stock in a well-regulated stock exchange? Yes. The ongoing development of the banking system in Indonesia has given entrepreneurs the ability to raise money through the stock market and venture capital with limited government control. Financial Freedom (Strong) How much control does the government exert over financial services? Indonesia received a score 60 out of 100 on the Heritage Foundation Index of Economic Freedom indicating limited government control over financial services. However, foreign investment in several sectors of the economy requires government approval. The financial sector remains stable, and a Financial Services Authority has been formed to improve regulatory efficiency. The government has allowed more foreign involvement in the financial sector, although limits remain. Source: Index of Economic Freedom 2014, Heritage Foundation Venture Capital (Very Strong) How easy is it for entrepreneurs to find venture capital? Ranked 17 out of 148; Score 3.7 out of 7; Trend 14 I nternational Property Markets Scorecard China 2011

15 Equity Investors (Very Strong) How easy is it to raise money by issuing shares on the stock market? Ranked 29 out of 148; Score 4.3 out of 7, Trend Source: The Global Competitiveness Report , World Economic Forum Credit Bureau (Strong) Core Question: Is comprehensive credit information available through public and private credit bureaus? Yes. Information at credit bureaus is readily available in the country while a strong percentage of firms and individuals have borrowing history and information. Talks about the first private credit bureau are underway. Overall Ranking 86 out of 189 Trend Coverage (Strong) What is the depth of information available in credit bureaus? Score: 4 out of 6 with a higher number indicating more information is available. Public (Very Strong) What is the extent of public credit registry coverage? 42.1% of individuals and firms are listed in a public credit registry with information on their borrowing history from the past 5 years. Private (Very Weak) What is the extent of private credit registry coverage? There is currently no private credit bureau in Indonesia, however there have been talks by the IFC to develop the first private credit bureau in the country. Source: Doing Business 2014 Getting Credit, World Bank 15 I nternational Property Markets Scorecard China 2011

16 First Private Credit Bureau in Indonesia International Finance Corporation ext_content/regions/east+asia+and+the+pacific /news/videos/ifc+works+with+partners+to+develop+the+first+private+credit+bureau+in+ind onesia 16 I nternational Property Markets Scorecard China 2011

17 3. Effective Governance Goal A popularly elected government free of corruption and functioning efficiently and transparently enough to guarantee economic freedom to individuals and support equitable property markets 17 I nternational Property Markets Scorecard China 2011

18 3.1 Democratic Representation (Strong) Core Question: Does the country have free and open elections for the leadership and can citizens engage in free enterprise? Yes. Indonesia s government has loosened market intervention and the voice of the public is often expressed freely, however there are some conflicts of interest between the branches of government in Indonesia, which has led to some mistrust of the public Voice & Accountability (Strong) Overall Ranking 54 out of Are citizens able to elect their government and do they enjoy freedom of expression, association and a free media? Yes. Percentile Rank 51.1 (2012); Trend Source: Governance Matters 2010 World Bank Are citizens free to form political and civic organizations free of state interference and surveillance? Yes. Score 6.7 out of 10 Source: The Economist Intelligence Unit Democracy Index pdf&mode=wp&campaignid=Democracy Public Information (Strong) Score: 77 out of 100 (2013) Are there regulations governing conflicts of interest in the executive and legislative branches of government? Executive Score: 69 out of 100 (Weak) Legislative Score: 73 out of 100 (Strong) 18 I nternational Property Markets Scorecard China 2011

19 Can citizens access legislative processes and documents? Yes. Score: 88 out of 100 Source: Global Integrity Report Indonesia Market Intervention (Weak) Overall Freedom Ranking 100 out of 178; Trend To what extent does the government intervene in the private sector including state owned industries? Score: 89.9 out of 100 with a higher score indicating less intervention To what extent does the government control prices? Score 76.4 out of 100 with a higher score indicating less control. Source: Index of Economic Freedom 2014 Heritage Foundation 19 I nternational Property Markets Scorecard China 2011

20 3.2 Lack of Corruption (Weak) Core Question: Is the public sector transparent and free of corruption? Corruption in Indonesia remains a very serious problem and is mostly seen through public opinion surveys and how each government system is set up. Corruption in the justice sector undermines the rule of law and results in the inability to enforce laws and uphold justice. Even though Indonesia s the civil service is strong, high levels of corruption are found in the police department and Supreme Courts with high costs and unfair decisions. Transparency (Weak) What is the perceived level of corruption in the country? Rank 114 out of 178; Score 32 out of 100, Trend = Source: Corruption Perception Index 2014, Transparency International Integrity Mechanisms (Very Weak) A National Integrity System is a framework where the principle institutions that contribute to integrity, transparency and accountability in a society can address corruption in a systematic way. Does a National Integrity System exist? No NIS assessment has been conducted for Indonesia. Source: National Integrity System Assessment, Transparency International Extralegal Payments (Strong) How often do companies report that officials and/or companies expect additional payments to expedite services or gain business? 23% (2009) of firms say they are expected to make unofficial payments on occasional instances Source: Enterprise Surveys, World Bank 20 I nternational Property Markets Scorecard China 2011

21 3.3 Efficient Administration (Weak) Core Question: Are quality services and qualified civil servants available to the public through the efficient use of public money? Size of Government (Very Strong) Even though Indonesia s government spending relative to GDP is well controlled, government effectiveness to implement and enforce laws is low. The quality of civil service in Indonesia is reported to be strong, however many civil servants admit to corruption through bribery (due to low civil service income) What is the size of government relative to GDP? 19% (25% to 30% considered optimum) Source: Index of Economic Freedom, Heritage Foundation Civil Service (Strong) What is the quality of the civil service? Score: 75 out of 100 Source: Global Integrity Report Government Effectiveness (Weak) What is the overall effectiveness of the government? Percentile Ranking: 44, Trend Source: Governance Matters 2012, World Bank 21 I nternational Property Markets Scorecard China 2011

22 4. Rational Dispute Resolution Goal An efficient institutional framework that balances the rights of the public, owners, lenders and borrowers in the event of a dispute or loan default 22 I nternational Property Markets Scorecard China 2011

23 4.1 Rule of Law (Weak) Core Question: Do all market participants abide by the rule of law and have confidence in the courts and the ability of police to control crime? Rule of law in Indonesia is one of the country s biggest weaknesses. Many high-level civil service officials are accused of bribery and money laundering while on the other hand, judges are accused of making biased decisions. This results in poor capacity to help the public resolve disputes and implement contract enforcement. Impartiality (Weak) What is the confidence level of the strength and impartiality of the police, courts and contract enforcement? Percentile Ranking: 34.1, Trend Source: Governance Matters 2010, World Bank Independent Judiciary (Strong) Can members of the judiciary be held accountable for their actions? Yes. Score: 86 out of 100 Source: Global Integrity Report Costs of Crime (Weak) What are the business costs of crime and violence? Partially excessive costs. Ranked 86 out of 148; Score 4.3 out of 7; Trend Source: The Global Competitiveness Report , World Economic Forum 23 I nternational Property Markets Scorecard China 2011

24 4.2 Enforcement of Contracts (Very Weak) Core Question: Are systems in place for timely and efficient enforcement of contracts? Indonesia s corruption problem reflects on the long process it takes to resolve a dispute with unrealistic costs as a percentage of the claim. Summary Proceedings are not available and the power-of-sale is replaced by the power-of-attorney for the creditor s benefit Judicial Enforcement (Very Weak) Ranked 147 out of 189; Trend What is the number of procedures involved in resolving a commercial dispute? What is the time between the filing of a lawsuit and resolution in judicial enforcements? 498 days What is the cost of judicial enforcements as a percentage of claim value? 139.4% Source: Doing Business Summary Proceedings (Very Weak) SQ 10 Summary proceedings are alternative dispute resolution processes where creditors can apply for a direct court order in property disputes. What is the time between notice of intent to foreclose and loan collection in summary proceedings if available to lenders? Not Available SQ 11 What is the cost of summary proceeding if available to lenders as a percentage of property value? Not Available 24 I nternational Property Markets Scorecard China 2011

25 4.2.3 Power-of-Sale (Strong) SQ 12 Power-of-sale agreements give creditors the power to sell properties after notice to the borrower without court intervention. What is the time between notice of intent to sell and loan collection for power-of-sale agreements if available to lenders? Power-of-attorney is used to sell specified property in Indonesia so as to provide a creditor with rights in the debtor's property. The Indonesian Civil Code (the "Civil Code") only recognizes two forms of security interests: mortgages and pledges. Mortgages may be created to cover either shipping vessels or land and other immoveable property (i.e. fixtures) located thereupon. Mortgages are the only publicly registered security interest available in Indonesia. Pledges may be created to cover a variety of tangible and intangible property. An Indonesian court will generally treat an assignment, fiduciary assignment, or fiduciary transfer as a pledge, although these instruments are not specifically contemplated in the Civil Code. SQ 13 What is the cost of power-of-sale agreements if available to lenders as a percentage of property value? Not available Source: The Enforcement of Indonesian Security Interests FindLaw Indonesia Indonesia Bankruptcy Law, Fifth Forum for Asian Insolvency Reform (FAIR) - OECD 25 I nternational Property Markets Scorecard China 2011

26 4.3 Commercial Dispute Resolution (Weak) Core Question: Can commercial disputes be resolved efficiently and fairly without exorbitant expense and delay? Commercial Courts have power in Indonesia to decide over property right disputes and foreclosures, however high costs and extended duration are probable without bribery of the civil service. Alternative Dispute Resolution in Indonesia is at its early stages in the country but actively growing. Survey Questions Commercial Courts (Strong) SQ 14 Do specialized commercial courts exist for the handling of property disputes and foreclosures? In Indonesia, Commercial Courts have the authority to examine and decide bankruptcy petitions and the postponement of debt payment obligations as well as other commercial dispute matters, as determined by law. To date, the only additional disputes handled by the Commercial Courts are intellectual property right disputes and foreclosures. Source: Indonesian Legal System - NYU Law Global Alternative Dispute Resolution (Strong) SQ 15 Are alternative dispute resolution mechanisms in place including commercial arbitration, private mediation and community based processes? Indonesia is a member of New York Convention and arbitration is well-accepted in contracts as a commercially attractive means of resolving disputes outside the courts. It can be said that the use of arbitration is rising with the internationalization of the Indonesian economy. The Arbitration Law specifically recognizes five ADR methods, they are: mediation, consultation, negotiation, conciliation, and expert opinion. These ADR practices are currently on the rise in Indonesia. Source: Dispute Resolution in Indonesia International Financial Law Review 26 I nternational Property Markets Scorecard China 2011

27 Commercial Treaties (Weak) SQ 16 What bilateral, regional and international commercial treaties exist concerning business between countries? Source: Indonesia is a member of the WTO (Jan '95) and ASEAN Free Trade Agreements (FTAs) exist with China, India, Australia, New Zealand and Korea. Also signed major FTA with Japan in 2007 and a preferential trade agreement with Pakistan in However, there have been increasing reports of late that Indonesia is planning to end bilateral investment treaties in search for new ones. The Dutch Embassy reports that Indonesia has decided to terminate the bilateral investment treaty with Holland and that it intends to terminate approximately 67 bilateral investment treaties (BIT). Many of these BITs were signed in the 1970's and 1990's, before Asia became a major economic factor and Indonesia became a G20 member. Indonesia will have to decide whether they opt for a standardized BIT or if they negotiate and sign individually and without consistency. World Trade Organization Bilateral Trade Agreements Indonesia- Indonesia to terminate more than 60 bilateral investment treaties Financial Times: Asia- Pacific. March 26, b4e2-11e3- af feabdc0.html#axzz38ysr4chz 27 I nternational Property Markets Scorecard China 2011

28 5. Financial Transparency Goal A well developed and transparent financial system that includes strong supporting institutions and highly trained and ethical professionals that contribute to effective financial intermediation and deep and broad access to capital and financial services 28 I nternational Property Markets Scorecard China 2011

29 5.1 Market Stability (Strong) Core Question: Are market risks sufficiently transparent and diversified so that efficient capital allocation can occur? Indonesia has attempted to tackle corruption with transparency as financial services are widely available. However, the insolvency process through commercial courts without alternative dispute resolution methods in place is an ongoing problem. Financial Reporting (Strong) What is the strength of the country s auditing and reporting standards? Ranked 72 out of 148; Score 4.6 out of 7 Financial Services (Strong) Does the financial sector provide a wide variety of financial services to businesses? Ranked 51 out of 148; Score 4.8 out of 7 Source: The Global Competitiveness Report , World Economic Forum Insolvency Process (Very Weak) Ranked 144 out of 188; Trend What is the average time to complete bankruptcy proceedings? 4.5 years What is the cost of bankruptcy proceedings as a percentage of the estate? 18% What is the recovery rate of bankruptcy proceedings? 17.9 cents on the dollar Source: Doing Business 2014 Closing a Business 29 I nternational Property Markets Scorecard China 2011

30 5.2 Independent Asset Valuers (Strong) Core Question: Do trained, independent and ethical asset valuers exist for all types of assets? Indonesia has several active measures in place to implement international valuation standards and educate their own people with quality training and ethics. Survey Questions Standards (Strong) SQ 17 How easy is it to find a valuer who implements International Valuation Standards? Indonesia is a member of the International Valuation Standards Council, classified as 'Valuation Professional Organizations ( VPO'). The Indonesian Society of Appraisers (ISA) has just issued a new valuation standard in 25 April The board claims that the standards adhere to the International Valuation Standard 2011 issued by IVSC in July 2011, and uses references from other standards around the world adjusted to the needs and condition of the valuation practice in Indonesia. Civil Society Resource: International Valuation Standards Council Training (Very Strong) SQ 18 What is the level of training of valuers? The Indonesia Society of Appraisers (ISA) has announced that new valuation standards have been put in place in 2013 and that International Valuation Standards from the Council will be followed. This is the fifth edition of the Indonesia Valuation Standards and is called KEPI and SPI (Standar Penilaian Indonesia). To obtain a license, the valuer submits a written application to the Head of the Center for Accountant and Valuer Service Development and must meet the following requirements: (a) ID Card and other proof; Bachelor s Degree or higher with issued diploma; proven member of a Professional Association (MAPPI); Passed Valuer Certification Test (exams very difficult); and minimum working experience in Valuation and Tax Payer Identification Number (NPWP). 30 I nternational Property Markets Scorecard China 2011

31 Civil Society Resource: Valuation Practices in Indonesia Penilai Indonesia valuation-practices-in-indonesia Ethics (Strong) SQ 19 Are opinions offered by valuers free of influence from parties to the transaction? As member of IVSC, valuers are expected to follow the IVS Code of Conduct. Civil Society Resource: International Valuation Standards Council Data Standards (Strong) Core Question: Is accurate property information available electronically in formats that are consistent with international standards? Property information is available online provided the user has an ID number, description, sale price, etc. Ongoing dedicated sites are emerging. Survey Questions Sales & Operating Data (Strong) SQ 20 A multiple listing service is an electronic exchange system where brokers and agents can widely share contracted real estate listings of properties that are for sale. Do multiple listing type services exist? Property listing services are in place and growing for all property types (house, land, condo, villa, etc.) and are available for all major cities and submarkets. Standard information about property includes: ID number, pictures, sales price, address, description, general operating information. International listings are available for popular vacation destinations such as Bali. Source: Situs Properti Terdepan di Indonesia SQ 21 Do resources exist for obtaining building income and expense estimates? Yes. However, consistency is based on agent Civil Society Resource: Situs Properti Terdepan di Indonesia 31 I nternational Property Markets Scorecard China 2011

32 Interchange Formats (Weak) SQ 22 Do electronic data interchange formats conform to international standards (ebxml electronic business using extensive markup language)? Electronic Data Interchange (EDI) is available through EDI Indonesia but real estate transactions are still transitioning from paper to electronic. EDI Indonesia has given numerous solutions to its customers via IT consulting, training, software development, and system integration and implementation. Technology based PDE services include the Value Added Network/VAN, EDI Over Internet, Web Services/SOA (Service Oriented Architecture), and Cloud Services. PT EDI Indonesia is now ISO 27001:2005 Certified. Throughout the years, they have facilitated domestic and international trade activities by using the Electronic Data Interchange 60 x 24 x 7 Civil Society Resource: EDI Indonesia (Member of IPC) Technical Standards (Very Strong) SQ 23 Do building codes and office building measurement standards (ANSI/BOMA Z65.1) conform to international standards? Indonesia BOMA is in place with affiliation of AMPRI (Asosiasi Manajemem Properti Indonesia). Building codes and office building measurements conform to international standards. Civil Society Resource: BOMA Indonesia 32 I nternational Property Markets Scorecard China 2011

33 6. Appropriate Regulation Goal A comprehensive regulatory regime that is transparent, efficient, simple in its implementation and that leads to accurate reporting of property values and prudent protection from market risks 33 I nternational Property Markets Scorecard China 2011

34 6.1 Fair Tax Regime (Weak) Core Question: Do market participants feel the overall tax rate is fair and participate in formal transactions? High overall tax rates and transfer tax remains a hindrance in Indonesia, while Foreigners are only allowed to own land under special circumstances and status. Transfer Tax (Weak) What is the total property transfer tax including all duties and payments? 5% Overall Tax (Weak) What is the overall tax rate on entrepreneurs (as a percentage of profits)? 32.2% Ranked 137 out of 188; Trend Source: Doing Business 2014 Paying Taxes & Registering Property, World Bank Divestment (Weak) Survey Question SQ 24 What is the tax on profits for foreign investors when divesting property? Foreigners are allowed to own property, however only under special circumstances. Nonresident individuals' rental income is subject to withholding tax at 20%, which is applied to the gross income. Rents are also subject to Value Added Tax (VAT) at 10%. Capital Gains derived by nonresident individuals from selling real property are taxed at a flat rate of 20%. Residents are taxed on their worldwide income at progressive rates, from 5% to 30%. The Land Code states that any individual foreigner can own land in Indonesia with status of Hak Pakai (Rights of Usage) or through leasehold. The Hak Pakai can be applied to either government land or Hak Milik (Freehold) land. Only Indonesian citizens may own land (property) with the title of Hak Milik (Freehold Title). Source: Global Property Guide Indonesia 34 I nternational Property Markets Scorecard China 2011

35 6.2 Professional Services (Strong) Core Question: Are the professional services necessary for efficient and transparent property markets available and appropriately regulated and supervised? There are tests and valuation standards for Asset Valuers, however most Brokers & Agents are unregulated and regulation is slowly emerging. In addition, Mortgage loans are regulated by licensed professionals. Asset Valuers (Strong) Survey Questions SQ 25 Are property valuers licensed and/or certified by the government? In Indonesia, there is a valuer certification test (USP) administered by the Indonesian Valuer Professional Society (MAPPI) in order to implement the Decree of the Minister of Finance Number 57/KMK.017/1996. This is a breakthrough to provide temporary solutions to determine the minimal quality of a valuer s qualification. Many foreign real estate companies such as DTZ, Colliers and Knight Frank provide valuation and consultancy services in Indonesia. SQ 26 How effective are mechanisms in place to discipline valuers who engage in misconduct? The Indonesia Valuation Standard (Standar Penilaian Indonesia SPI) are the guidelines that must be studied and implemented by a valuer to serve in conducting valuation. Civil Society Resource: Valuation Practices in Indonesia Penilai Indonesia valuation-practices-in-indonesia Brokers & Agents (Weak) Survey Questions SQ 27 Are real estate brokers and agents licensed and/or certified by the government? No. The Real Estate Brokers Association of Indonesia (AREBI) conducts training and disciplinary procedures. AREBI has petitioned the government to consistently follow up regulation on the obligation to possess Property Brokerage License (SIU-P4) since with 35 I nternational Property Markets Scorecard China 2011

36 such requirement, the movement of property brokerage companies would be smoother and more orderly. SQ 28 How effective are mechanisms in place to discipline brokers or agents who engage in misconduct? At present, property sales are without definite regulation, however through the act of each broker having a license, the state will also be able to benefit from tax revenue. The regulation is designed by the government in Regulation by Ministry of Trade No.33/M- DAG/PER/8/2008 and with such regulation; companies will be obliged to have licenses to run their business. AREBI members will hopefully be able to obtain their licenses within one year since many property agents have yet to apply for membership. AREBI predicts it only manages around 10% from the current number of property agents in Indonesia. Civil Society Resource: Real Estate Brokers must have Property Brokerage License Bisnis Indonesia Mortgage Professionals (Strong) Survey Questions SQ 29 Are mortgage professionals licensed and/or certified by the government? Mortgage loans are regulated and available while mortgage banks (local and foreign) and licensed professionals are ready to offer services such as home loans, property financing, mortgage solutions, etc. In late 2013, Bank Indonesia (BI) issued new regulation on mortgages in an effort to help relieve property speculation and reduce fraud. The central bank introduced fresh minimum down payment rules for second properties. The LTV ratio for the purchase of a second property will be cut to 60 percent and 50 percent for purchases past the second property. On the other hand, clients will also be required to declare their preceding mortgages when in search for new loans. Source: In Indonesia, New Mortgage Rules Aim to Cool Market World Property Channel SQ 30 How effective are mechanisms in place to discipline mortgage professionals who engage in misconduct? Misconduct leads to revocation of license. 36 I nternational Property Markets Scorecard China 2011

37 6.3 Capital Markets (Strong) Core Question: Are capital markets well-regulated and diversified enough to provide financial resources to private-sector entrepreneurs and innovators? Capital Flows (Strong) Indonesia is strongly open to FDI investment, transparent in bankruptcy laws protecting borrowers and lenders (facilitates lending), and reflects strong securitization of GDP How restricted is the flow of capital into and out of the country? Ranked 61 out of 148; Score 4.6 out of 7 Source: Index of Economic Freedom 2014 Heritage Foundation Security Exchanges (Strong) Is the regulation of securities exchanges transparent, effective and free of influence from government and industry? Ranked 57 out of 148; Score 4.3 out of 7 Source: The Global Competitiveness Report , World Economic Forum Securitization (Strong) What is the depth of asset-backed securities, mortgage-backed securities, high-yield bonds and highly leveraged loans? Ranked 16 out of 62 countries; Score 2.6 out of 7 Source: Financial Development Report, World Economic Forum 37 I nternational Property Markets Scorecard China 2011

38 Recommendations Indonesia Property Markets Scorecard Challenges & Recommendations 1) Implementation of New Civil Service Reform There are roughly 5 million people in Indonesia s civil service and the new civil service law will need to be implemented by President Joko Widodo (to take office October 20, 2014), who will succeed Susilo Bambang Yudhoyono ( ) In the past decades, Indonesia s ability to adapt to growing globalization has left the country in need of structural reforms of its bureaucracy and the quality of government officials that are hired to develop and sustain an efficient and modern system. In recent times, Indonesia has had high levels of corruption, especially found in the civil service and judiciary, which undermines the rule of law. The police department has progressively been a weak link of public accountability and many civil servants are actually the first ones to admit to corruption and view it as a serious problem. A key problem in Indonesia s civil service is the existing salary system. To attract efficient and transparent employees in the government sector, appropriate benefits and merits need to be put in place to offer competitive compensation for quality of work. Currently, civil servant salaries fall into one of two scales. Under the single scale system, employees at an equal rank obtain the same salary regardless of the type of job and the level of responsibility. Under a double scale system, salaries are identified based on employees level of responsibility and type of job while job performance is usually not taken into account. This reflects poor to no incentives for employees to perform appropriately while creating an incentive to supplement income through corruption. Civil servants are ranked from I (lowest) to IV (highest) with ranks I through III being divided in four grades (a, b, c, d) and rank IV in five grades (a, b, c, d, e). Educational qualifications come into place when rankings are announced and the basic salary for low ranked servants is approximately $70USD/month while the highest ranked employee (IVe) with over 30 years of experience receives roughly $215 (2008). That highest paid job is only about 6-8% of the average salary of an Indonesian state- owned enterprise CEO. In addition, civil servants have the power to access legal and illegal resources and allowances funded under the development budget and what they receive in allowance is based on the relationship with the power brokers in their organization regardless of their agency or department. The main aspect that the government needs to focus on to resolve this problem is the complex employment policies and salary levels to increase transparency and reduce discretion. The current patronage- based system needs to be dissected and replaced by a simpler compensation system where labor market analysis is conducted. Through such analysis and ongoing surveys that should be 38 I nternational Property Markets Scorecard China 2011