DRAFT IMPLEMENTING INDONESIAS NEW HOUSING POLICY: THE WAY FORWARD

Findings and Recommendations of the Technical Assistance Project Policy Development for Enabling the Housing Market to Work in Indonesia.

Marja C. Hoek-Smit
Based on the Reports Produced by the Team of Consultants under the Policy Development for Enabling the Housing Market to Work in Indonesia Project

June 2002

Kimpraswil, Government of Indonesia and the World Bank

TABLE OF CONTENTS ACKNOWLEDGEMENTS EXECUTIVE SUMMARY 1.0 INTRODUCTION

1.1 1.2 1.3 1.4 1.5 Background to the report HOMI in context Key Characteristics of the Housing Market National Development Strategy Principles and Main Strategies of a New Housing Policy The Importance of Good Governance Creating an Effective Public Environment Lowering the Risk of Housing Investment Ensuring Good Quality Housing Assets The Importance of Housing Finance Expanding and Strengthening the Primary Market Long-term Funding for Mortgage Finance Developing Low Income Housing Finance Strengthening the Regulatory Environment 01 01 02 04 05 08 08 09 10 11 13 16 19 21

2.0

STABILIZING THE HOUSING ENVIRONMENT

2.1 2.2 2.3 2.4

3.0

MOBILIZING HOUSING CREDIT

3.1 3.2 3.3 3.4 3.5

4.0

FACILITATING SPEEDY RELEASE OF SERVICED LAND

4.1 4.2 4.3 4.4 Main Issues Constraining Land Supply Improving the Efficiency of Land Titling and Registration Facilitating the Supply of Land and Improving Permitting Process Completion of the Decentralization of Land Administration 23 23 25 29

5.0

PROVIDING HOUSING ASSISTANCE

5.1 5.2 5.3 5.4 5.5 The Demise of the Old Subsidy Programs Goals and Design Criteria for New Housing Assistance Programs Three Complementary Subsidy Programs for Housing Home-owner Assistance Programs to Increase Access to Finance Neighborhood Block Grants to Local Governments for Upgrading and Mixed Development Incentives for Local Rental Housing Provision 31 34 36 37 43 46

5.6 6.0

SUPPORTING PARTICIPATION PROCESSES

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7.0

RATIONALIZING GOVERNMENT INSTITUTIONAL CAPACITY IN THE HOUSING SECTOR

7.1 7.2 7.3 The Changing Government Housing Context Clarifying Public Sector Functions and Relationships A New Housing Agency and Housing Fund The Role of Existing Statutory Housing Agencies 49 49 49 58

7.4 8.0 9.0

CO-ORDINATING GOVERNMENT INVESTMENT CONCLUSIONS AND PRIORITY ACTIONS

61 62

Appendix 1 Appendix 2 Appendix 3 Appendix 4

Summary of Main Issues Related to Demand for Low and Moderate Income Housing 63 Affordable House Prices for Household Income Cost Comparisons of Different Finance Linked Subsidies Financial Sector/ Mortgage Finance Indicators and Lending Portfolios 69 71 72

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Acknowledgements
The HOMI (Housing Market Indonesia) project as it was fondly called, was based in the Directorate General of Human Settlements Development (DGHSD) in the Department of Settlements and Regional Infrastructure (Kimpraswil). It was a major program with several components -- housing and land markets, housing finance, housing assistance programs, community-based housing-- each staffed by independent teams of international and local consultants and supported by local counterparts and an inter-ministerial Technical Committee. To name all those we worked with in the course of this project would be impossible. We would like, however, to express our particular appreciation to Ir. Djoko Kirmanto, the then Director General of DGHSD; and to Ir. Imam S. Ernami, Director of Technical Support, and Dr. Ir. Iskander Saleh, special advisor Housing Finance Division, for all their support, discussions and suggestions. Our counterparts deserve special thanks, since they were the buffer between the team and the internal and external environment and were an invaluable source of local knowledge. Marja C. Hoek-Smit June 2002

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1.0 1.1 Background to the Report

INTRODUCTION

The Government of Indonesia (GOI) through the Ministry of Kimpraswil, Directorate General Housing and Human Settlement with support from the World Bank, to launch a technical assistance project to support a housing policy reform project; Policy Development for Enabling the Housing Market to Work in Indonesia. This report is a summary of the conclusions and recommendations of the main reports produced for the different components of the study by separate consulting teams. It is meant to facilitate access to the vast amounts of information contained in eleven different reports.
1

The authors of the different reports were: Sally Merrill and Erica Soeroto for Housing Finance, Michael Lee, Sally Merill, Arie Hutagalung, Bob Sudjana Tantra on Land and Housing Markets, Jo Santoso, Dodo Juliman and Budi P. Iskandar on Community-based Housing Programs and Institutional Arrangements. Widiarto, Budi P.Iskander and myself worked on the overall Policy Framework and New Institutional Arrangements, and I was responsible for the Housing Demand study and the Finance linked Home-ownership Assistance Programs and with Douglas Whiteley for Mortgage Insurance.

1.2

HOMI in Context

By standards of many of its Asian neighbors the housing and housing finance sectors in Indonesia are under-performing. Housing investment in Indonesia is approximately 1.5% of GDP, compared with a range of 2% to 8% in comparable countries. Similarly, mortgage finance equals 25% of GDP in Malaysia, while in Indonesia this figure is only 3%. Housing has the potential to be an important economic sector, contributing to job creation, expansion of the finance system and creation of household wealth. Housing can also be a powerful tool in redistributing income or wealth. Economically, financially and socially the sector could play a more prominent role in the recovery process. Certainly the low and uncertain incomes are an important factor in the limited role housing plays in the economy. The weakness and inefficiency of the financial sector further hinder expansion of a healthy housing delivery system.

While summarizing the analyses and main recommendations provided in the different reports, I have clarified some of the arguments, adjusted the structure where that appeared helpful, and altered, some recommendations.

However, housing institutions, policies and programs impede the efficiency and expansion of the sector. There is not a clear Champion for the housing sector that can calibrate public and private sector housing inputs. Functions and tasks are scattered throughout different agencies and departments without clear coordination and without a view to decentralization of the housing functions. Under the current housing policy system, the delivery of market produced non-subsidized housing units for low- and moderate-income groups has declined (although the slow economy has also contributed). Production is nearly entirely dependent on the KPR interest rate subsidy. Yet, no households below the 60 percentile of the
2 income distribution can afford a 21 m RS house. th

GOI through the Ministry of Kimpraswil, Directorate General Housing and Human Settlement, decided to develop a new housing policy framework in line with the new development objectives for the country. The Homi teams consolidated contribution to the development of a new housing policy and strategy for the country is the starting point for what surely will be a long-term policy reform effort. Detailed analyses on the housing and land market, the housing finance system, housing finance subsidy programs and community-based support programs, and proposals for institutional change are provided in individual reports. This report summarizes the main policy recommendations in the context of the teams proposed new policy framework.

1.3

Key Characteristics of the Housing Market

Housing shortage in urban areas. Preliminary census 2000 data show that there are roughly 21 millions households living in urban areas (42 percent) and 28.8 millions in rural areas (58 percent). The total population grew by only 1.19 percent during the last decade, down from 1.95 in the previous decade. However, all growth occurred in urban areas, which grew by more than 4 percent. If we assume these trends to continue during the next decade (using an estimated urban growth rate of approximately 3.5 percent for the next few years) Indonesia needs to house roughly 735,000 new urban households per year. These figures do not include the housing backlog --the number of households currently living in overcrowded and unacceptable housing units. Comparing this requirement for new urban houses with the average formal sector, KPR financed housing production of 120,500 units per annum (between 1994 and 1998), the challenge facing the country is clear. Different housing requirements of regions and local governments. There are major differences between the housing needs of different regions. Existing backlogs and growth figures vary widely. Regions and local authorities also differ in their financial and

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

human resource capacity to address their housing problems. Given these differences, varied policy responses are necessary. Housing tenure. Approximately three-quarters of urban households are homeowners. While the emphasis of government policies has been on home-ownership, rental housing will continue to be vital to housing market operations and labor mobility. Most of the rental stock is private, both room rentals and house rentals, but Indonesia has a relatively small proportion of government-assisted and employer rental housing. Low finance affordability. House prices are modest relative to incomes. The median urban (outside of the DKJ Jakarta) household expenditures (a proxy for income) are
2 approximately Rp.800,000 to Rp.900,000 . A modest housing unit costs approximately 2

to 4 times the median urban income. However, with current high mortgage interest rates, 60 to 65 percent of households cannot afford an unsubsidized RS type house (Rp.19 million)-- the lowest priced house currently produced in the market. Appendix 1 provides a summary of the Housing Demand Study and Income and Finance Affordability Worksheets. Lack of finance availability. Unsubsidized mortgage lending is only available for the top 25 percent of the urban income distribution. There is a lack of long-term investment instruments which makes banks reluctant to extend longer-term loans. Collateral risk is another reason for lack of lending. Lenders are reluctant to provide loans for houses with a value below Rp.50 million and in risky neighborhoods. The difficulty of acquiring formal mortgage finance has escalated with the shift to self-employment as a result of reduction in wage employment after the crisis. While unsecured micro-finance loans are widely available, the current micro-finance loan instruments are not suitable for new house construction. There is a lack of other medium and shorter-term loans or credit-line products suitable for housing. There are welfare costs related to the limited availability of housing finance and the inefficiencies and small scale of the formal housing production in general(a) there is a negative impact on affordability, (b) it takes households a much longer time than necessary to construct a decent house, (c) the entire real estate industry remains small and inefficient, and (d) with such a large proportion of households underserved by the market, the demand for subsidies and special requirements for the private sector grows. Insufficient serviced land, particularly for moderate and low-income housing. Local capacity for land administration is weak and hinders the local supply of land for affordable housing. Equally problematic is the fact that there is an excess of idle landland suitable for housing development, which is held out of the market, creating unnecessary land shortages.
2

Depending on the CPI inflation ratio applied.

Fragmented housing policies, programs and administrative systems. There are currently many departments and agencies dealing with housing, land, residential infrastructure, and housing finance, whose policies are not well integrated. The main housing law and related decrees no longer conform to the overall government development plan and need to be amended. Similarly, there are a multitude of housing, housing finance, residential infrastructure and urban poverty projects, with fundamentally different or overlapping types of subsidy systems. Lack of housing capacity. The predominance of the KPR subsidy system, has prevented public and private sector experimentation and innovation in the low-income housing sector. There is an urgent lack of capacity in housing and housing finance. Uneven enforcement of land and housing policies and regulations. There is much uncertainty in the legal and regulatory environment related to land, land development, and construction and housing finance. This drives up costs and risks of doing business in the sector and makes housing less desirable as an investment sector. Well-developed housing market institutions. The main formal market players developers, contractors, appraisers and mortgage lenders are competitive and represented by strong trade associations. Moreover, a wide variety of micro-finance institutions exist in most regions. While the crisis has weakened both real sector and finance institutions, there are signs that the market is recovering. Also, as a result of the crisis, the structure of the mortgage sector has fundamentally changed. BTN is far less predominant and the environment is one of healthy competition. A culture of self-construction and mutual help, but a weak NGO support system. There is a strong tradition of households building their houses incrementally with a contractor or individual laborers. It is the main way of saving and wealth creation for households. The majority of the houses are built in this way. In rural areas the tradition of communities assisting each other with the construction of houses is preserved. In urban areas, these self-help efforts require assistance from intermediary organizations. In most regions this intermediary level of institution does not exist or is provided on a voluntary basis, hampering the scale outputs required in the low-income sector. The challenge for the new housing policy is to build and enhance the current strengths in the housing environment while vigorously addressing the weaknesses.

1.4

National Development Strategy

The transition to a rule-based democratic society requires dramatic institutional reforms. The housing sector is both influenced by these transformations and can be an important catalyst for change. Particularly, the ongoing decentralization process and deepening of civil society

participation will play a critical role in framing the new housing policy. The 1992 Housing Law will need revision in line with these new developments. The decentralization laws No.22/1999 and 25/1999 stipulate a drastic increase in the regional share of government spending. These laws define housing as a function of local government. The requirements for decentralization decide the type of fiscal allocation to the housing sector at a national level, and have a profound influence on empowerment of communities and the provision of local housing resources. While there is not yet complete consensus on the specific terms of decentralization, and Law 22 and 25 are still under review, it is certain that the new housing policy needs to be based on the principle of decentralization. Furthermore, the balance between the decision-making power and the fiscal resources is dealt with in Law 25, 1999. in order to empower and improve the local economy, create a fair, transparent, participative, and accountable budget system. Law 22, 1999, section VIII, article 83.1, focuses on ways in which people engage in local governance. It specifies that participation is both the right and the responsibility of the people in order to create a sovereign state (section VI article 8). Thus, decentralization and participation are closely connected. In addition Law No.28/1999 (part of the anti-corruption measures) also stipulates the requirement for local participation. Propenas. Another major influence on the housing sector is the national development plan for the five year period 2000 to 2004 as laid out in Propenas. This development strategy emphasizes empowerment of economic actors while at the same time decentralizing the government. to fill the inter-regional and urban-rural disparities, to overcome the crisis impact, the central government devises new policies. The central government allocates more funds directly to local governments, boost efforts to alleviate poverty and stimulate economic activities. However, these efforts will be redundant unless the government successfully empowers economic actors, especially low-income people. In this respect, better access to economic as well as natural 3 resources for low-income people should be improved. The new housing policy will have to be framed within the parameters of these national development strategies.

1.5

Principles and Main Strategies of A New National Housing Policy

The transformation in the political and development strategies of the country have not yet been translated into a coherent housing policy framework. The 1992 Housing Act does not reflect the basic development and decentralization changes and needs to be adjusted. Initial housing

objectives were formulated in Propenas and in Kimpraswil documents. These need to be consolidated into consistent strategies. HOMI was asked to assist in that process. Below we propose the fundamental principles and strategies for the housing sector in line with the national development goals. 1.5.1 Vision and Goals

Housing includes land, services and infrastructure, finance, different production agents, etcetera. There is currently no real Leader or Champion for the sector, which can integrate and coordinate the different components. Without such leadership, an integrated housing policy for the country cannot be developed. HOMIs first recommendation is to establish an Inter-Ministerial Committee as the Champion and Visionary for the sector. The Inter-Ministerial Committee should be supported by specialized sub-committees, which prepare opinions and lead policy changes related to the different sub-sectors of housing. Under the guidance of the Inter-Ministerial Committee, a new housing law will have to be developed, stating the vision for the housing sector and the overall goal towards which all implementers of the housing policy should work. In a decentralized environment, central government will define broad national housing goals. In addition, central government must ensure that regional and local governments set housing goals. These goals will include housing delivery targets --houses or serviced land delivered with central and local government assistance and housing delivery by private sector actors-- as well as institutional development goals. However, visions and goals are only as good as their implementation strategies, to which we focus our attention. 1.5.2 Fundamental Principles

To guide the current transformation in housing policy, it is critical to formulate clear principles that need to govern housing policy development in Indonesia at all levels and to make it consistent with the development strategy of the country. Partnership and participation. Government is committed to have people participate democratically in the processes of housing policy decision-making. Governments role is to provide financial resources and the necessary regulatory and support structures for the private and community sector to deliver housing. Fairness and equity. The housing policy must promote fairness and equity among all Indonesians. Government programs will need to provide a wide range of support options and not discriminate in terms of location, income, gender, religion or creed.

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

Quality and affordability. Housing must be built to an acceptable quality and at prices people can afford. Innovation. The housing policy should foster innovation, creativity and diversity, particularly in terms of the products provided and the environments that are created. Transparency and accountability. The housing policy should be implemented with transparency, both in financial and allocation procedures and particularly in terms of housing assistance programs and the related flow of funds. It is vital that appropriate monitoring systems are implemented and that responsible authorities and implementers are held accountable for performance against clear standards. Sustainability and fiscal affordability. The government has insufficient resources to meet the needs of all underserved households in Indonesia. Sustained and substantial investment in housing from the private and household sector is essential. Thus a central focus of the housing policy is to create a normalized market that will attract maximum private investment. Applying these principles to the design of housing subsidies, we can summarize that programs should be transparent, well-targeted, on-budget, based on the need for fiscal discipline, administered in an efficient and effective manner, provide incentives for the strengthening of market and public institutions, and be tailored to meet the varied needs of lower-income households in differing circumstances. Subsidies should be designed to leverage household, financial sector and local government investment in housing. The allocation system should conform to future decentralization requirements. 1.5.3 The Seven Strategies Of The National Housing Policy

Following the policy objectives specified in the Kimpraswil documents and the HOMI TOR and subsequent analysis, we have defined seven key strategies for implementation of Indonesias National Housing Policy. These strategies serve the purpose of bringing together main policy activities in a coherent framework for implementation: 1. 2. 3. 4. 5. 6. 7. Stabilizing the housing environment Mobilizing housing credit Facilitating speedy release and servicing of land Providing subsidy assistance Supporting participation processes Rationalizing institutional capacity and housing investment Coordinating government investment in development

A wide range of policy initiatives, acts, and institutions has been created, or are proposed by the HOMI team, to implement these strategies. We will summarize these initiatives below and indicate in which HOMI reports details can be found.

2.0 2.1

STABILIZING THE HOUSING ENVIRONMENT

The Importance of Good Governance

The stability and transparency of the legal and political environment is critical for housing system development. It affects to a great extent the efficiency of the housing system, its ability to attract private and NGO partners and foreign funds. The following issues have to be addressed: Creating an effective public environment Lowering the perceived risk in the low and moderate-income sector of the housing market, by ensuring that contracts are upheld, regulations enforced, procedures standardized and executed in a timely fashion, and risks shared among appropriate partners. Ensuring good quality housing assets. Most of the issues we discuss here are detailed in the sections on finance, land, subsidies and institutional structure in this report. It is important, however, to summarize the fundamental legal, process, and institutional issues that hinder the healthy growth of the housing sector. Technical improvements alone will not make a difference if the housing sector does not provide a stable investment environment.

2.2

Creating an Effective Public Environment

The public sector can only play a supportive role when funding and legal issues, and institutional functions are well defined and focused on the healthy expansion of the housing sector. Funding. o The current uncertainty in the level and type of private and public funding for housing hampers participation of the private sector and other housing actors. A multiyear funding plan to improve access to medium and longer-term funds for the private sector and for new housing subsidy programs needs to be put in place to provide sufficient confidence for private and NGO investment. Legal Framework. o The decentralization law and agrarian land law are being amended and the final outcomes are not yet known. This creates insecurity in the land and housing policy environment and impedes the development of strategies that clearly incorporate and are based on the principle of decentralization. The strategies detailed in this report assume a decentralized budget and housing context. o The Housing Law No. 4/1992 needs amendment before it can serve as the legal basis of the housing system. The law should be redrafted to define the new roles

of central, regional and local government and civic society. Chapter 7 begins to detail a new division of functions for housing in a decentralized environment. Institutional Framework. o Current housing agencies lack the coordinating and professional capacities to guide the housing sector in the new ways set out above. We recommend a new institutional structure for the housing sector in Chapter 7. o The new roles of the statutory housing agencies Perumnas and BTN-- are unclear. Assessments of Perumnas have been conducted and a new assessment of BTN has recently been completed. We comment on the proposals in the section on rationalizing institutional capacity below. State Capture related to the formation of policy and establishment of laws and regulations. Currently, widespread influence peddling by private and public sector actors and major conflict of interest issues characterize decisions on: o Functions of existing state housing institutions, their recapitalization, continuation and (hidden or implicit) subsidy provisions. Equally, undue influence may hamper efforts to establish new public housing institutions. o Design, legislation and fund allocations for new or existing special housing assistance programs. We suggest a re-arrangement of government housing functions and institutions that would create a necessary distance between the political and legislative, and executive branch of government related to the execution of housing assistance programs (see Chapter.

2.3

Lowering The Perceived Risks Of Housing Investments

Impressive progress was made during the last decade in issuing property rights to residential plots-owners. This access to titles will facilitate the implementation of proposed strategies. Additional improvements are suggested in Chapter 4. Major title risks still exist in the process of land acquisition by developers, which hampers borrowing for subdivision and infrastructure, and even access to construction finance. See Chapter 4. Current planning and building regulatory and approval procedures vary widely by local government, and delay residential development. We propose that standardized procedures for local government land allocation, subdivision, permitting, and infrastructure agreements be developed. (See Chapter 4) In the housing finance system unnecessary risks exist because of unclear appraisal systems, mortgage contracts, and foreclosure procedures. Suggested improvements are summarized in Chapter 3 and detailed in the in the finance sector report.

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Default risk and costs are hindering the lowering of LTV ratios and the perceived quality of mortgage portfolios. HOMI proposes consumer education and a possible future private mortgage insurance system to mitigate the default risk to lenders. Corruption related to the implementation of law, rules and regulations is widespread and adds to the cost and risks of housing and unnecessary poor quality of the urban environment. Some of the most critical areas to address are: o Enforcement of land administration regulations such as the location permit system, approval of land subdivision and building plans. o o Implementation of foreclosure procedures. Administration of new subsidy programs. Incentives should be built in to prevent moral hazard and rent-seeking behavior by lenders, borrowers and subsidy issuing institutions. (See Chapters 5, 6 and 7)

2.4

Ensuring good quality housing assets

Property rights are critical to enhance the value and transferability of housing assets. Experiments are ongoing to facilitate the process of normalizing titling. Sound property appraisals will force discipline on developers and contractors when finance is sought for housing. HOMI identified improvement of the appraisal technique and processes as a major requirement for market development. Quality control will be required on housing produced by developers and contractors as part of government programs, in particular when the fixed RS/RSS types will be eliminated. Equally, the quality of the location of government-assisted housing will need to be monitored in relation to access to basic services. Neighborhood quality and risk are serious deterrents for housing demand and housing investment and are often overlooked in housing programs.

The Inter-Ministerial Committee and its sub- committees should play a critical role in developing a sound public environment for the housing sector and ensuring that regulations are enforced the way they were intended.

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3.0 3.1

MOBILIZING HOUSING CREDIT

The Importance of Housing Finance

The health and strength of the financial sector are important to both long-term development and more immediate efforts to alleviate poverty. Mortgage finance will become an increasingly important part of the financial sector. This pattern has long been observed in emerging, transition, and developed economies alike, and it is already occurring for some of Indonesias neighbors, such as Malaysia and Thailand. In Indonesia, however, the housing finance sector is smaller than it should be. First, the sector has suffered severely from the 1997/98 crisis and has not yet recovered. Banks are pursuing very risk-averse policies.
4

Second, the expansion of the

housing finance market has been inhibited by a housing subsidy policy that is detrimental to incentives for down-market growth. This situation should begin to change as Indonesia recovers from the financial crisis and economic growth reasserts itself over the medium term and housing policy will become more enabling. Housing finance has a number of extremely important roles to play in both the housing market and the broader economy. First, it increases effective demand for housing by providing financing of housing upfront to be paid back over time. Housing finance also will deepen the financial sector and the links of the banking sector to the capital market. 3.1.1 Different types of housing finance

We distinguish three types of housing finance for Indonesia: mainstream housing finance, which provides unsubsidized mortgage finance to qualifying households (in Indonesia loans in this category range from Rp. 100 to 300 million, with few lower than Rp 50 million); moderate income housing finance, with loans of roughly Rp.10 to 25 million (currently, this is primarily limited to the KPR subsidy system and a few regional banks writing smaller mortgage loans); microfinance for housing, a non-mortgage finance approach to housing credit characterized by small loans for example, Rp.10 million or less - used for incremental building, improvement and expansions (micro-finance loans are widely available in Indonesia, but are designed for Small and Medium Enterprise development rather than housing). Ideally, all households that want credit and would qualify should have access to credit for
5 housing. The current housing finance system in Indonesia serves only a fraction of those

households. Mainstream banks limit themselves to roughly the upper 10 percent of urban
4
5

See the report by BI Credit Crunch in the Aftermath of the Crisis. See the HOMI Report Effective Demand for Low Cost Housing for complete information on income and affordability.

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households and an even smaller proportion of rural groups. The KPR subsidy system reaches only a fraction of the eligible households.
6

However, for most households, long-term financing is

not appropriate and medium-term or shorter-term financing and/or repeat loans are more suitable. New loan products, and alternative approaches to underwriting, including non-mortgage credit for housing-related purposes, should be developed in the micro-finance sector to facilitate the delivery of authorized moderate/low-income housing. Our recommendations deal with the development of each of those housing finance sectors. 3.1.2 Structure of the banking industry

The number of private banks has fallen dramatically because of recapitalization of insolvent banks by the GOI as a result of the crisis. State-owned banks now hold the majority of deposits (70 percent compared to 37 percent in 1997) and have slightly increased their share of loans outstanding, from 40 to 43 percent (See Appendix 4). Banks balance sheets are now dominated
7 by recap bonds and SBI bonds (Bank Indonesia securities). . Capital adequacy and credit risk

are the two main concerns in the banking sector. CAR (capital adequacy ratio) . Despite recapitalization of the banking sector, the CAR position of many banks is still problematic, and in several cases it is only adequate because of the zero risk weighting of GOI paper. This situation, combined with chronic land titling concerns and depositors unwillingness to place medium or longer term deposits with banks, restricts the interest in expanding long-term lending. The loan-to-deposit ratio has fallen drastically for most banks post crisis. The liquidity position is not the constraint to initiate loan expansion, but the CAR is. Non-performing loans (NPLs) vary highly amongst banks, but are generally high. The majority of the banks for which HOMI received data had NPLs well over 5 percent. However, mortgage loans performed much better: by the year 2000, the amount of mortgage loans delinquent for 180 271 days was only 1 percent for national state banks and 2.25 percent for regional banks. Of course, these are new portfolios since the crisis or mostly restructured portfolios bought from IBRA. Construction loans continue to perform poorly with 10 to 20 percent default rates.

More importantly, the KPR subsidy system stifled expansion of housing finance for modest income households, since most banks considered this part of the market as the domain of BTN (the State Housing Bank) and did not develop systems to reach that part of the market. 7 On average 50 percent of assets

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3.2
3.2.1

Expanding and Strengthening the Primary Mortgage Market

Overview

At the end of the year 2000, mortgage lending was only 0.91 percent of GDP, compared to 2.83 percent in 1996, and constituted 4.3 percent of total credit. About one third of the total amount of mortgage loans outstanding in 1999 was subsidized. To some degree subsidized housing loans supported the sector during the crisis period. Unsubsidized real estate finance dropped from 2.28 percent of GDP in 1996 to 0.69 percent of GDP in 1999. Construction lending ceased for the most part. Close to two-thirds of mortgage loans outstanding in the year 2000 was held by state banks. Bank Danamon has the largest mortgage portfolio since it successfully acquired several mortgage pools sold by IBRA. While mortgage portfolios perform well, relative to other credit, this may be related to the risk-averse attitude of banks; banks mostly make loans for high value properties (Rp.50 million and above) and for housing in non-risky existing or new neighborhoods. Few banks expressed an interest in moving to smaller loans for less affluent clients. Also, current interest rates are too high to generate a considerable demand for moderate income mortgage lending (driven by high yield on government bonds and high rates of savings deposits by institutional portfolios). Most would only consider moving down-market if the government would have an attractive subsidy program in place, the playing field amongst banks would be level without preferential treatment of BTN, and land titling and foreclosure procedures would be improved. 3.2.2 Asset-liability management

The short-term nature of banks deposit liabilities in relation to the fairly long term of mortgage loans poses a limit on extending mortgage lending. Banks have limited access to long-term funds from pension funds, insurance companies or capital markets, or mechanism to improve the liquidity of mortgages. While banks can issue medium term bonds against their pool of mortgages, this is relatively expensive. With risk free and liquid SBI paper available at relatively high returns, there is limited appetite to expand mortgage credit. A combination of GOI policy initiatives to manage and measure risk (e.g., prudential measures to induce banks to undertake prudent asset-liability management), and develop capital market funding capabilities (see below) will be required to improve asset-liability management and increase the scale and efficiency of the mortgage sector. 3.2.3 Underwriting practices and assessing of credit risk

There are several critical weaknesses in the underwriting of mortgage loans in Indonesia. We recommend the following changes:

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Improving and standardizing property appraisals. Appraisals often do not assess real value of the property, but are based on cost or developers sale price. The appraisal profession needs to be professionalized and methods need to be standardized. Establishing a Credit Bureau is an important steps and one that is already partly underway in Indonesia. A credit bureau acts as a clearinghouse for credit information on potential borrowers. Banks, credit card companies and other debt providers would post credit information on all clients in the bureau. Members can access this information before they issue a loan to an individual, thus facilitating the decision on whether and how large of a loan to issue and on what terms. A credit bureau could start with a simple register of outstanding debts and arrears of all individuals. This effort could be linked with the credit bureau initiative to assist the development
8 of SMEs undertaken by the Ministry of Cooperatives with ADB support. Gradually, more

integrated systems could be developed. The following findings and recommendations should be considered: A special Working Group under the Inter-ministerial Subcommittee on finance should be established to carry a Credit Bureau initiative forward. The banks expressed a strong feeling that the Credit Bureau should be private.
9

Credit Scoring could be initiated by individual banks simultaneously to the development of a credit bureau. HOMI recommends that banks intending to be heavily involved in mortgage lending, implement specialized IT systems for mortgage finance that allows them to gradually develop the capacity for credit scoring. Banks should develop internal mortgage portfolio databases. Perbanas may also wish to develop an analysis database, on its own behalf and that of the smaller banks. Banks should begin to analyze the credit risk fundamentals in their own portfolio in order to improve their assessment of would-be borrowers. They can combine their own underwriting models with Credit Bureau data.

While HOMIs Financial Sector Report recommends one integrated credit bureau for Indonesia, for all types of lending and users, using one unique structure, this may not be the right structure at this time. 9 The Law on Bank Indonesia No.23/1999 specifically article 32 sub-article 1, stating that BI arrange and develop an interbank information system, should be revised.

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3.2.4

Loan Recovery Tools

Improving Foreclosure Procedures. Foreclosure is too often costly and slow. While the probability of entering into default may be reasonably low, the probability of sustaining major losses, once a default occurs is extremely high. HOMI recommends the following improvements: The existing mortgage law is sufficient to accommodate the foreclosure process. However, the mortgage law and the Dutch law of 1848 (RID Art. 200) can come into direct conflict when the debtor is not cooperative and court action is required. If the debtor (or legal occupant) refuses eviction, he/she cannot be evicted without a court order. HOMI makes detailed recommendations on streamlining this conflict. The new role of the Government Auction Agency, as a policy making body should help streamline the auction process. See details in the Finance Report. The Supreme Court should confirm, in the form of a Circular or Guidelines, that the standard credit agreement meets the criteria for foreclosure in accordance with article 6 of Undang-Undang Hak Tanggungan (UUHT), which stipulates that the auction request can be addressed straight to the Auction Office. Delays and lack of transparency within the Court offices are responsible for many of the foreclosure problems. Improvements in court operational procedures fall within the purview of the Department of Justice. Establishing Mortgage Default Insurance (MDI). Mortgage insurance can be an important mechanism to enhance credit quality and entice lenders to move down-market.
10

However, non-

assisted MDI is expensive in markets were risk is difficult to assess and collateral not always an efficient security (see housing assistance section for preliminary calculations). It is unlikely to be utilized in an already expensive mortgage market and may hamper the growth of the market if lenders require that borrowers buy MDI. However, private, non-assisted MDI may be important to facilitate down-market lending when the market normalizes and collateral improves. 3.2.5 Administrative Risk: Improving Standardization

Standardization of information requirements and procedures can considerably improve the efficiency of the mortgage industry. It will also facilitate the establishment of mortgage insurance and encourage participation of long-term investors in mortgages. Standardization of the mortgage documentation is already underway. Draft documentation has been prepared and submitted to a Task Force. Appraisal procedures require stricter rules and regulations.

10

An assessment of the feasibility of mortgage default insurance (MDI) as a key subsidy instrument has been conducted as part of the HOMI study and is discussed in the section on housing assistance programs.

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3.2.6

Technical assistance and bank training

HOMI considers training for bankers and technical assistance to niche lenders interested in low/moderate income lending to be a critical component of a down-market strategy and recommends centralizing and coordinating these efforts through Perbanas.
11

Issues should

include the functions and mechanisms of a credit bureau, credit and mortgage scoring systems, risk-based pricing and homeowner counseling, servicing systems, foreclosure procedures, mortgage insurance and methods to reduce operational risks, alternative mortgage instruments to deal with different risks, and preparing portfolios for accessing long-term funding. Regional banks and a number of other state and private banks already provide unsubsidized KPR for moderate income borrowers, although in very modest amounts, and appear interested in going down market. These lenders should be encouraged through technical assistance and training to apply more modern concepts. Some larger lenders have developed partnerships with US subprime mortgage lenders to acquire this knowledge. 3.2.7 Eliminating the KPR Subsidy System and Establishing an Alternative Role for BTN

Mainstream banks and other lenders are not likely to lend down market until the KPR subsidy program is replaced with a market-friendly subsidy approach and until the future of BTN is clarified and they can be assured of a level playing field in this segment of the market.

3.3

Long-term Funding for Mortgage Finance

After the primary mortgage market has improved risk assessment and management methods and the efficiency of its operations, long-term investors may become interested in providing funds for the expansion of the mortgage market. Both mortgage bankers and the government of Indonesia, have discussed accessing long-term funds from pension funds or insurance companies directly or through capital markets as a panacea for expanding mortgage lending. However, it is extremely unlikely for long-term investors to show an interest in the mortgage sector before risk issues are better dealt with. Similarly, it would not be prudent for government to facilitate or participate in accessing second tier mortgage funding before addressing policy and regulatory inefficiencies in the primary mortgage market. Having said that, we discuss alternative ways to obtain long-term second-tier funding for mortgage lending, while addressing different types of risk in the primary market.

State banks, including the regional banks discussed here, are currently represented by HIMBARA. HIMBARA will soon be merged with Perbanas.

11

17

3.3.1

Different models to access long-term funds

12 Indonesia has long discussed the option of developing a secondary mortgage facility (SMF) or a 13 secondary mortgage market (SMM), in order to deal with liquidity and term mismatch issues in

mortgage lending. These two types of systems to access capital markets can take several specific forms and are by no means the only way to obtain long-term funding for mortgages. For example, individual banks can issue their own bonds against their mortgage pools (the European system) and BTN has already done this. Banks can also try to obtain long-term funding without going to the capital market. For example, they can engage directly in wholesale mortgage loan transactions with other banks or arrange for loans from long-term investors, such as pension funds, using the mortgages as collateral. With shallow capital markets or capital markets dominated by government securities, as in Indonesia, alternative funding structures may be more attractive. Capital market funding of mortgage portfolios can address other issues apart from long/medium term resource mobilization. For example, a true secondary mortgage market removes the mortgages from the balance sheet of the bank and, therefore, eliminates interest rate risk for the bank. It also provides capital relief since the bank no longer carries the mortgages on its books. None of the other resource mobilization strategies have those advantages. Irrespective of the type, secondary mortgage transactions provide incentives for improving the quality and standardization of mortgage loans in the primary market. The need for and choice of a secondary mortgage strategy for Indonesia, depends on the constraints that need to be addressed in the primary market. Certainly, there will be a need for increased funding as the housing finance sector recovers. However, the assumption that banks are not now engaging in scale mortgages lending because of liquidity constraints is a misleading and over-simplified description of the current situation. At the present time, lack of liquidity is not the major issues preventing a surge in mortgage lending, but term-mismatch is. Banks do not make mortgage loans, because they do not have access to medium to long term funds. Banks are also extremely risk averse, and a more complete recovery from the crisis and further strengthening of the primary market, in particular the assessment and management of credit risk, are both necessary. However, capital market access or other ways to access long-term funds remains an appropriate goal for the medium term. HOMI makes the following recommendations for a long-term funding strategy for Indonesia:

On-balance-sheet funding of mortgages by an SMF, which in turn may issue bonds in the capital market. The purchase of mortgage loans without recourse by an entity (mostly a conduit), which can issues securities against the mortgage pools.
13

12

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3.3.2

Initiating steps to facilitate accessing funds from long-term investors either directly or through a secondary mortgage facility: The Inter-Ministerial Committee should designate a Working Group under the Finance Subcommittee to facilitate ways for pension-funds, insurance companies and other institutional investors to make loans to mortgage lenders, possibly through the creation of a refinancing facility or SMF. An institutional champion for this effort should be agreed upon as soon as possible. We suggest that the Working Group be headed by Bappenas, with members including MOF, Kimpraswil, BI, and the Department of Justice. MOF should assess the regulatory changes required to allow insurance companies and pension funds to engage in long-term second tier mortgage funding (e.g., allow a larger proportion of investments in financial real estate assets). Nearly all current mortgage portfolios are relatively new. The new, post-crisis portfolios will likely be the assets used for an SMF. These portfolios must be further seasoned before their characteristics can be fully understood by analysts. The Working Group should provide assistance for development of a database for analysis of the mortgage portfolio characteristics, perhaps centered in Perbanas (see above).

3.3.3

Commissioning a feasibility study of alternative refinancing structures and their regulatory and market requirements.

A thorough assessment for a possible refinancing mechanism or SMF proposal should be undertaken. Such a study should include; the ownership structure, prudential regime and supervision and any special provisions necessary to facilitate the competitiveness of the SMF debt instruments in the capital market. A feasibility study should further include the following issues: Potential investors and the types of loans/bonds they might invest in, Comparative costs of raising funds for mortgage lending via an SMF as compared with other options open to the banks, Characteristics of the newly developing mortgage portfolio, including NPLs, will need to be undertaken to help ensure the success of an SMF. Type of government participation in the inception and the development of long-term capital instruments. If an SMF model is to be followed, we suggest that Indonesia examine the features of two of the most successful liquidity facilities worldwide Cagamas, the Malyesian mortgage facility , and the Federal Home Loan Bank system in the USA. An earlier proposal for an Indonesian SMF by Michael Lea and Alex Pollock
14

14

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

19

included a minority (10 percent) participation of the government, but with a sunset clause. This model may be revisited. HOMIs recommendations are that Indonesia avoids a non-market refinancing mechanism and/or special requirements such as mandatory investments in low income housing and below-market interest rates, such as those in effect for Malaysias Cagamas. A market-based approach to mortgage finance is especially important for Indonesias banks to shed the legacy of the KPR subsidy system. 3.3.4 Long-term Options: Development of SMM and Securitization Tools

A true secondary mortgage market conduit, which buys the mortgages from the primary lender and issues securities against polls of acquired mortgages, has far more complex demands than an SMF. It may not be necessary in Indonesia and will in any case be feasible only in the much longer-term. However, some steps may be taken to facilitate off-balance-sheet funding, including securitization, in the future: Have the SMF, after a period of successful refinancing of mortgages, examine the option for lending with little or no recourse. Malaysias Cagamas is currently experimenting with non-recourse lending. Its experience may be useful for Indonesia to follow. A Subcommittee Working Group on Secondary Markets should continue to develop the legal and administrative infrastructure for securitization. Development of an SMM would require addressing a number of legal and regulatory issues, including the trust concept, bankruptcy remote, and mortgage registration in accordance with sales of securities. Efforts in developing the legal infrastructure for securitization have been underway since 1999.

3.4

Developing Low Income Housing Finance

While microfinance is widely available in Indonesia, although to a more limited degree in rural areas, it could benefit from a more focused approach on microfinance for housing (MFH). MFH is not a panacea for the low income housing sector but it can become a significant stand-alone tool for loans for home improvement, home expansion, including for development of rental rooms, and for new construction conducted on an incremental basis.

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3.4.1

Strengthening the Technical and Commercial Base of Microfinance Institutions:

Technical skills in the microfinance sector are often low, and credit programs offered by the existing network of MFIs are mostly not undertaken in a commercially viable way. For example lending rates are not based on real cost of lending. This weakens the sector and makes its expansion into housing lending problematic. We recommend several actions to strengthen the sector: Investigating a capacity building role for the micro-finance network (GEMA PKM) or the soon to be develop training center discussed by CGAP, GTZ, AusAid, in expanding a MFH Network. These institutions, possibly with assistance from BRI, could help promote MFH as an explicit component of microfinance and assist in developing MFH loan products and underwriting policies. The networks of Bukopin, the Cooperatives, the BPD, the LKPD, and so forth, should be assessed under an expansion effort. GOI and donor programs should move away from providing subsidized credit to MFIs that will be on-lent with subsidized rates to borrowers. Subsidies to borrowers can be provided in other ways (varied supply and demand type subsidies) as can subsidies to the MFI sector (e.g., technical training for MFIs). In sum, care should be taken not to allow subsidized credit programs to crowd out strengthening of commercially based microfinance institutions. 3.4.2 Developing a Range of MFH Loan Products

One key issue is whether to design and introduce loan products more specifically to support MFH. Some of the issues include: Whether the housing loans should be somewhat larger and longer term than the microenterprise loans. Whether underwriting and collateral should be linked to prior savings programs, as an approach to self-insurance. How to increase lending for private sector rental housing. Rental housing for low income households is a priority. Private sector, low income rental accommodations in owneroccupied housing is one way to alleviate this pressure. BRI already lends to homeowners for the purpose of building additions to their dwelling to be used for rental. BRI could assist other MFIs to develop rental housing loan products. 3.4.3 Integrating Microfinance Projects into Microfinance Systems

Housing project-based micro-finance, while useful, is often tied to unstable MFIs. Credit is not provided on a commercial basis, but is considered part of the housing project and the participating MFI institutions and their credit policies remain weak. Cobild, a donor funded community-based MFH system operated through Kimraswil, is a case in point. Clearly, valuable

21

lessons are being learned from the Cobild project concerning community-based endeavors, affordable building technologies, and so forth. But the credit aspects of the program are bringing the wrong message to those who wish to strengthen the institutional structure of MFIs and provide commercially based credit. Cobild and similar institutions could focus their role on integrating the credit component of housing projects into the formal financial sector by: Using civic groups only as transaction intermediaries with formal sector lenders. Using group loans as one of the criteria in underwriting for commercial loans. If a household successfully completes this loan, it could receive a certificate for a follow-on individual loan with an MFI. 3.4.4 Funding MFIs

Constraints posed by access to adequate funds for MFH will need to be addressed, particularly if housing loans will become part of the lending menu. Establishing a liquidity fund for MFIs may be one option. At the same time, Indonesias network of low income lenders is well positioned to enhance savings generation. New funding solutions should not discourage a certain class of MFIs to raise funds through savings deposits. However, this will require improved regulations and supervision of MFIs. The World Bank is working with the GOI on this issue. In addition, the World Bank Pilot Project on Microfinance is considering the development of a liquidity fund to support housing micro-lenders. Efforts by Kimpraswil to expand housing lending down-market should be coordinated with this pilot.

3.5

Strengthening the Regulatory Environment

Commercial real estate lending is risky and cyclical and is often the cause of bank failures. For these reasons, a countrys regulatory agencies should adopt parameters and supervisory procedures that are explicitly responsive to risks inherent in mortgage finance. Indonesia is in the midst of important new development in regulation and supervision. A new supervisory institution, the Financial Supervisory Authority (OJK), and the Integrated Financial Supervisory Institution (IFSI) would assume all supervisory functions, leaving BI with the regulatory function for banks. HOMI suggests that the following regulatory issues related to real estate finance be considered: 3.5.1 Improving BIs supervisory reports for real estate finance
15

Recently BI changed its reporting requirements such that mortgage loans (KPR) are no longer reported separately from consumer lending. This decision ought to be reversed and call reports ought to differentiate real estate lending from other lending.

15

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

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Particular attention should be given to trends in developer and construction credit, which are sensitive to the cyclical nature of real estate. The quarterly review of underwriting trends needs to closely watch changes in this type of lending. The lenders require more prudent underwriting methods (see below), reliable information systems and proper provisioning. Consumers need protection against developers financial distress. 3.5.2 Reviewing regulatory risk weights for mortgage loans

When residential lending picks up and an assessment can be made of mortgage portfolio performance, the currently stringent reserve (mortgages have a 100 percent risk weighting) and other guidelines (LTV ratios, Income to Payment/Debt ratios) for residential lending should be reviewed. 3.5.3 Closer monitoring of appraisal methods

The banks seem to have neither a uniform approach to appraisal, nor a sufficiently stringent approach to the rules and regulations that encourage independent and professional valuations. Self-regulation by the appraisal industry appears to be inadequate. Closer monitoring of the appraisal methods used by the banks is critically important. While HOMI has not done a separate study of the appraisal industry, it is recommended that this be carried out. 3.5.4 Improving supervision, monitoring and regulation of micro-finance and

cooperative financial institutions Currently, most non-bank micro-finance institutions are poorly, or not at all, monitored or supervised. Indeed, there is confusion about the responsibility for supervision of this financial sector between the Ministry of Cooperatives, BI and MOF. Data collection on the sector is haphazard and incomplete and scattered amongst different agencies. The regulatory system, for both micro-finance and cooperative financial institutions is equally unclear and unsupportive of a healthy growth of the sector. HOMI recommends a complete review and strengthening of the supervision and regulation of micro-finance and cooperative financial institutions located in BI or MOF. Such an effort should be linked to the provision of technical assistance and liquidity funding for the sector, described in the previous section.

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4.0

FACILITATING SPEEDY RELEASE OF SERVICED LAND

4.1

Main Issues Constraining Land Supply

A well functioning housing system requires access to sufficient serviced land at a fair price. There have been several recent positive changes to land administration regulations and practices and to the land titling system. Nevertheless, several important constraints remain to the efficient functioning of the land market for housing: unnecessary complex and costly titling of land, inappropriate regulation, severely constrained supply of land because land is being held out of development by a variety of agencies (e.g., IBRA) and as a result of the permitting system, and the incomplete decentralization of land administration functions. There are several positive actions by which the Government can make the housing market more efficient. We make the following recommendations. Most will require inter-ministerial coordination. Improving the Efficiency in Land Titling and Registration Facilitating the Supply of Land and Improving the Permitting Process Completion of the Decentralization of Land Administration

4.2
4.2.1

Improving the Efficiency of Land Titling and Registration

Facilitating Land Titling

Although progress has been made in a number of areas, land titling issues remain a key stumbling block in the efficient delivery of land. The entire process of granting a location permit, submitting the land rights application, granting of land title, registration, and registration receipt is time-consuming. The land rights application is submitted to the land office in the Kab/Kotamadya, granting of land title is done by a BPN office, either regional, provincial, or national, and registration and issuance of the registration certificate is done at the land office in the Kab/Katamadya. The following recommendations are made in order to simplify the process: Granting of land title be executed by Land Office in Kab/Region if the location is within the area of Level II Local Government (Kab/Kotamadya); If the location is within several Level II Local Governments, granting of land title is issued by the Governor upon the local governments recommendations; and The national BPN office should become largely a policy-making body, setting up the guidelines and policy implementation strategies. Granting of title is delegated to Level II Local Government with the exception of land located within several local governments.

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4.2.2

Facilitating the transfer of a Hak Milik title to individuals

One major issue of land titling is the long period required to provide a purchaser of a house from a developer (holding a Hak Gunabaguna (HGB) title to the entire developed area) with a mortgageable title (Hak Milik or an individual HGB). We recommend that: BPN takes no action to prevent developers from initially splitting the title to the benefit of fictitious individuals; and, The Minister of Home Affairs be asked to declare housing developers as permitted corporations under the Basic Agrarian Law, and thus allow them to hold Hak Milik in place of HGB rights. 4.2.3 Facilitating the conversion of Hak Girik to Hak Milik titles

This process is currently costly (both in fees and informal payments), especially for lower income households. For this reason, many households choose not to make the conversion, which unduly limits their access to formal sector housing finance, as many lenders will not accept HG title as collateral. A recent pilot program has shown that it is possible to reduce the costs of converting HG to HM, and these findings should be implemented more broadly. 4.2.4 Improving the quality of the land title

There are a number of issues relating to land title that make residential mortgages unduly risky, time-consuming and, therefore, expensive. Titles are uncertain, because of latent claims, fraudulent practices, and unpredictability of court decisions. These issues hinder the efficiency of mortgage lending and impede the development of mortgage insurance and secondary mortgage markets. Most of these issues can and should be addressed by the proposed Land Management and Policy Development Program, to be supported by the World Bank and the revised Basic Agrarian Law. Improving Title Registration: A land registration system serves to record land titles and interests for public record. It serves as a basis for land trading and credit security. Unregistered land is not acceptable security for bank loans. In Indonesia, like in many other countries, the registration system does not guarantee the title, but merely provides evidence of it. Recent improvements have been made in registration procedures. Indeed, improvements in titling and permitting procedures are now relatively more important in increasing efficiency and land supply. However, many individuals still do not register their titles because of relatively high fees and lack of transparency of procedures. Several recommendations to improve registration follow: Land registration can be made more effective by revising PP 24/1997 to achieve: o Simplification of standardized forms of title evidence, Deed of Mortgage, and Sales Purchase Deed. If the APHT is registered or the Mortgage Certificate is

25

simplified into just 1 sheet, it will not be necessary to provide a registration receipt for a mortgage. o o Enforcing the requirement that registration be undertaken within seven days. Strengthening enforcement powers of the PPAT to improve compliance with existing requirements. We recommend that BPN, together with the Ministry of Home Affairs (Dalam Negeri) where relevant, should report on the feasibility of these reforms. 4.2.5 Allowing Non-Registered Properties as Credit Collateral

The Land Administration Project of the World Bank has detailed several ways that would allow householders to raise credit on unregistered parcels. We support those recommendations.

4.3

Facilitating the Supply of Land and Improving the Permitting Process

Currently high costs are incurred and excessive time is spent by the private sector, including individual households, to obtain development, subdivision, planning and building permits. The bureaucracy is structured so as to connive at hidden charges. Restrictive regulations and complex and costly procedures can severely limit the availability of land and increase its price. These increased costs are passed onto the consumer. HOMI makes several recommendations to lower these costs and improve the supply of land to the market. 4.3.1 Facilitating Release of Land to the Market

The land supply is more constrained than need be, especially for low income housing. Most of the land that could be developed for housing around Jakarta and, maybe, around other major cities, is not legally available. Holders of large tracts of idle land are: IBRA, developers, local government, Perum Perumnas, the Military, large manufacturers and industrial estates. In addition there are many holders of small vacant plots. Because this idle land does not form part of the supply of land for new housing, it may be expected thatall other things being equalthe price of land is significantly higher than might otherwise be the case, and helps to keep house prices high. Holding land out of development is also contrary to the spirit of Indonesian law. We therefore make some recommendations for stimulating the supply of land. These include: Land held by IBRA should be sold by open and transparent auction, without restriction on the type of bidder, and within the time frames agreed within government and with the international community. Insofar as it may be possible to disaggregate some of the holdings into smaller parcels, this would be preferred. However, existing, time-expired Location Permits should not automatically be transferred to new purchasers. Other proposals to dispose of IBRA land through transfers to local government or a new land bank to secure funding for a liquidity facility, are not supported by the HOMI team.

26

Refinancing of mortgage loans should be done by regular and long-term market investors to discipline and strengthen the sector, and not by closed non market-based special circuits. Public Sector Holdings. A sub-committee or task force working under the InterMinisterial committee should, together with Perum Perumnas, DKI Jakarta and other local governments, the military and perhaps, BPN, and other public land holders: o Review the land needs of each agency, and subsequently auction any land surplus to these needs. o Review the Location Permits on these lands and revoke the permits where appropriate in the same way as for private holdings. Private Land Banks: Large developers may hold very large tracts of land. It would be logical for developers to develop first the land they own, before buying the residual land under location permit. It would be both in the public interest and in the longer term interest of the developers, if government took a lead in increasing the supply of land with a view to driving prices down. We recommend to increase the supply as follows: o o Review and revoke unused Location Permits (See Section below). Change the Land and Building Tax (PBB) to allow higher PBB charge on idle land, to encourage corporations and individuals with small holdings to release or develop it. The committee currently examining changes to the PBB law should promote this change. Local governments to take the lead in reviewing land availability, especially for new lower-income housing, with a view to assembling and promoting development packages. It will be necessary to acquire outside, impartial, expertise to assist local governments to plan negotiate and, perhaps, implement land packaging in this form. Foreign donors would be receptive to financing advisory services of this nature, perhaps through one of the associations of local governments. Pro-active provision of infrastructure. A precondition for the development of land for housing is the availability of on-site infrastructure. However, provision of infrastructure often follows the unauthorized development of houses and there are currently severe funding shortfalls for infrastructure provision. The more pressing issue, therefore, is one of servicing informal housing areas. We believe it is appropriate for local governments to use the proposed National Housing Fund resources to complement other KIP-type funding sources. In addition, the revenues generated by improved land management, for example, increased land releases by public bodies, tax on frozen land (see below), can be channeled into the servicing of additional land.

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4.3.2

Lowering the cost of regulation

Interestingly, in Indonesia, the actual standards required for subdivision, planning and building are not the main constraint in developing low and moderate income housing. Rather, the formal and informal fees related to acquiring the necessary development permits and the interest cost over the period required to receive the permits are exceedingly high --in the order of 16 percent of project costs. This figure excludes the cost of restricting the supply of land discussed above. Although regulations have been issued regarding the maximum time to be taken by officials in completing certain processes, these regulations are often not observed. The time and the cost of obtaining permits therefore continue to be much higher than is officially allowed. We recommend the following improvements: Ministry of Home Affairs taking a lead in assisting local governments to draft decrees simplifying approval processes. Disseminating the lessons learned from the land office in Jakarta Barat, which has simplified the regulatory system and provided developer incentives for low-cost housing construction. 4.3.3 Revision of the Location Permit System

Amongst all the development regulations, the Location Permit is considered the most detrimental to encouraging a regular supply of developable land. Two characteristics of the Location Permit are important for this discussion. Firstly, grant of a Permit has been seen as conferring exclusive rights of acquisition on the developer holding the permit, but without requiring him to acquire the land. The system makes it difficult for land owners to sell their land to a third party; reduces incentives to put land to the most economic use; and is potentially environmentally-damaging, since environmental issues generally take second place to pecuniary considerations. Secondly, Location Permits are normally valid only for a limited period of timeone to three years, depending on the area of land involved. A permit could be renewed for one additional year if the developer could justify its extension (such as by demonstrating good faith in acquiring at least 50 percent of the land designated in the Permit). However, the Izin Lokasi legislation states that if all of the land has not been acquired within the specified period, the permit should be legally revoked for implementation of the regional plan, or to be released to other entities. This regulation is, however, not enforced and developers often fail to develop, or even to purchase the land. Land is held for speculation and land banking and monopolistic situations are created. BPN issued a clarifying regulation in 1999 (Circular No. 2/1999). This re-stated certain parameters, including the maximum amount of residential land holdings permitted to development companies, and the length of time for which a permit is valid. It also stated that the grant of a Location Permit does not covey an exclusive right to the holder of the permit; it merely permits the

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holder to negotiate acquisition with the affected landowners. This means that a landowner may choose not to sell, in which case the land isin theoryavailable for other developers. Nothing in the legislation prevents the sale of land to third parties. This provision is not widely known however. HOMI has the following recommendations to improve efficiency, stimulate enforcement and provide education about the system: Efficiency: Reducing the time taken to obtain Location Permits by limiting the number of members of the coordinating review committee. Requiring that all local governments set up a simple system for monitoring compliance with residential Location Permits. A central body would be needed to assist them in establishing and maintaining the system. Reducing the complexity of the process by: o Reducing the number of steps needed for approval of the Location Permit (establish a fast-track model for approving permits); o o o o Re-calculating a more realistic maximum period for the issuance of a new Permit; Consolidating all fee payments within an acceptable formula; Making these regulations transparent, by publishing them widely; and Establishing an appeals procedure.

Enforcement: Invoking the provisions of PP 36/1998 to encourage developers holding land under Location Permits, in excess of their immediate needs, to donate the surplus amounts to government for use for public projects in exchange for renewal of the residual Permits. All other Location Permits for land not required for development in the near term should be revoked if not used. Education: Educating all affected landowners on the implications of the issue of a Location Permit covering their land. This could be tasked to the local land offices. Requiring that local land offices should clarify the status Inpres No. 23/1998 to developers, which revokes the need to obtain an Izin Prinsip. In the context of increasing local autonomy, local governments can and should determine how to reduce and simplify the approval process. This would be done by issuance of a Regional Government Regulation (PERDA/Mayors Decree). The resolution of many of these topics will be addressed by the World Bank-funded Land Management and Policy Development Program. The success of this program should be regarded as a very high priority for the success of a national housing policy

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4.3.4

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

The 1-3-6 rule was introduced by central government in 1974 and was reformulated in 1992. It requires (private) developers to build 6 units of simple housing and 3 units of mid-standard housing, to every 1 unit of luxury housing constructed. This requirement is customarily included as a condition of the Location Permit. However, the 1-3-6 rule is formulated vaguely and it is easy to circumvent. Its implementation is rarely monitored. Apart from lack of enforcement, there is a principal weakness in the concept. Effective demand is higher for one-class neighborhoods and these are therefore preferred by developers. Nevertheless, this is insufficient reason to abandon the mixed development concept, which is in line with the constitution of the country. Several alternative approaches could be adopted. Improving the workings of the current 1-3-6 regulation: o o Implementation responsibility must be taken by local governments Developers must be required to observe the regulation within the planning jurisdiction that issued the permit. o The current principle of mixed development could be integrated in the zoning regulations. Encouraging the local sale of certificates of completion, a device which would permit developers to claim virtual compliance with the regulation. Thus, for example, a developer specializing in low cost housing could sell a certain number of certificates of completion of low cost housing to another developer. In possession of the certificates, the latter would then be able to obtain a permit for high cost housing. This would require careful monitoring to be in place to make sure that the same certificates are not sold repeatedly.

4.4

Completion of the Decentralization of Land Administration

KEPRES 95/2000 effectively abolished BPNs administrative authority over local land offices. The administration of local land policy was to fall under the mandate of local government. Because of concerns about a lack of capacity at the local level, a Presidential Decrees 10 and 60/2001 was issued to delay a full transfer of responsibilities for two years. Several recommendations by the COMO Consulting Project, deal with this issue, and we fully support those. Providing donor assistance which aims to develop and disseminate examples of good practice in local land offices: o providing examples to be emulated not just by upgrading hardware, providing training or streamlining structures, but by setting examples for a systematic process of change;

30

strengthening horizontal exchange on Good Practice, e.g. via workshops, and the establishment of a network, including a web site, that facilitates horizontal exchange among the Kantor Pertanahan Kabupaten/Kota; strengthening the service delivery capacity of BPN Pusat for supporting the regions.

Introducing a Quality Management system throughout the local land offices. Strengthening local capacity for land administration. Considerable capacity building for staff of local offices, under the new, decentralized environment will be necessary over coming years. This, indeed, is to be a focus of the proposed World Bank-funded Land Management and Policy Development Program (LMPDP). The success of LMPDP, and of any successor program of capacity building, is critical to the success of many of the recommendations on land made in this HOMI report. We recommend that it should be given full support by all relevant agencies and donors.

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5.0 PROVIDING HOUSING ASSISTANCE

5.1

The Demise of the Old Subsidy Programs

GOIs housing programs are in disarray. The Government of Indonesia now faces the difficult task of reforming the housing policy framework and developing programs that will provide the country with the continuous housing support systems it requires. It has to do so in the context of decentralization and the related budgetary changes that will allocate most of the development funds to the local government levels. Given the limited fiscal resources, new national policy and programs need to focus on leveraging private sector, local government, NGO and household resources to increase authorized housing production. 5.1.1 The main KPR housing program

The corner stone of the GOI housing policy was the KPR interest rate subsidy for loans for specific house-types. Participating lenders receive subsidized liquidity credit from Bank Indonesia (BI) for part of the loan amount and on-lend at fixed, below-market interest rates to qualifying households. The interest rates charged to borrowers and the proportion of liquidity credit to lenders varies per cost of unit. Developers, public and private, seek qualifying customers to whom they pre-sell the houses. They receive mortgage finance to the borrower directly from the bank and construct proto-type houses at set prices. No further appraisals are conducted and real values of the houses are not assessed, posing a risk to the lender. From the standpoint of the developer, this system is, of course, highly profitable since no construction credit is required. The great majority of the subsidized loans were issued by the government housing bank, BTN, which held approximately 80 percent of all mortgage assets in the pre-crisis period. The non-subsidized mortgage sector remained relatively small. The system remained unchanged since 1974 until the economic and financial crisis of 1997. However, the 1997 collapse was just the final straw for a system that had become untenable and had an increasingly negative impact on housing market and housing finance sector development . After the crisis, and as part of the IMF agreement, BI liquidity funding for KPR subsidies was ceased and MOF had to carry the subsidy on its RDI budget. It is supposed to be phased out by 2004. We summarize the main issues as follows: Unsustainable cost of the system. With rising market interest rates and unadjusted subsidized rates, the cost of the subsidy increased. The high cost of the housing subsidy system became painfully clear when BIs off-budget low-interest funding was eliminated
16

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and MOF had to take over the subsidy at present value costs. Current budget constraints will make the level of subsidy focused on this market segment alone unfeasible, the more so since no international soft funding is available for this type of subsidy. Inefficiency of the system. The subsidy is inefficient in several ways: o Compared to other finance-based instruments, the cost of the current subsidy is unnecessarily high. Even for a Rp.20 million house, with a modest interest rate subsidy (an interest rate of 14 percent compared to a market rates of 20 percent), the present value of the subsidy is approximately Rp.4 million. o Beneficiaries would have preferred to spend the subsidy on self-constructed houses in other locations, if they had been given the opportunity to choose. o Beneficiaries do not appear to value the houses at their real cost and, the program is not designed to enhance the long-term value of the properties. Many are vacant (Perumnas information) and many units are worth less than the construction price from the outset, because of poor neighborhood conditions and location. Inequitability of allocations. Since the program is mortgage finance based it can only serve households that qualify for mortgage loans. This means mostly fixed income earners and a disproportionate number of civil servants. Negative influence on housing market expansion and innovation. The subsidy system was meant to increase the role of private lenders and developers in moderateincome housing. It did succeed in doing so, but only for the allocated number of subsidized housing solutions. No innovations were stimulated in the market place beyond the KPR subsidy program. In fact, expansion and innovation were hindered because competition with the subsidized loans and houses by market-produced programs was unfavorable. Negative impact on urban development. Since the government-set house prices of the subsidized house types did not go up with increasing land and construction cost, the quality of the subsidized houses went down, both in terms of construction quality and location/neighborhood quality. No RSS houses can be built in Jakarta and other major cities because of land costs. Sometimes developers would cross-subsidize the low-cost units, a system that is not sustainable and will lead to fewer low-cost units being produced. Mostly, developers built low-cost units on cheap land far away from infrastructure. 5.1.2 Successful ownership and upgrading projects without an institutional home

Indonesia has developed and implemented some of the worlds most successful low-and moderate income housing projects. For example KIP, IUDIP, PPMK and varied community16

The HOMI report on Homeowner Assistance Programs provides a detailed analysis of the subsidy system.

33

based housing projects are acknowledged as highly effective approaches in improving the living standards of local communities. They coordinated different inputs and ministries, incorporated community participation and local capacity building. However, what these projects have in common apart from their success is that they were dependent on donor funding and died when the funding cycle stopped. When the project implementation units were closed, the accumulated knowledge, procedures and systems disappeared as well. No continued budget allocation was afforded to these projects, and no institutional continuity was provided. 5.1.3 Government-Assisted Rental Housing Programs

Most of the rental housing in Indonesia has been supplied by the private sector, in the formal and informal markets. However, a relatively small part of the market has been provided by the public sector. About 2.6 percent of Perumnas sales between 1995 and 2000 consisted of flats (3950 units), and more than 7000 new rental flats are planned by Perumnas. DKI Jakarta has told us that all of their new housing will be in the form of rental units, and they have plans for the construction of around 3,000 rental units in the next five years or so. While there is a need for a continued involvement of the public sector in the rental sector, there are serious shortcomings with the current programs.
2 The units are generally provided in 4- or 6-storey walk-up blocks, with units typically of 31 m , but 2 sometimes as little as 18 m . Observation suggests that maintenance of some of the blocks is

rather poor. Rental charges are set by a formula based on the cost of construction, for example to recover 50 percent of the construction cost over a period of 20 years. Whether by chance or judgment, rental charges for new units come to about 25 percent of the minimum wage. Rent recovery and the ability to evict for non-payment of rent is a major problem in at least some of the public housing blocks. Some specific issues are: Rental Cost Model and Subsidy Estimates. The full extent of the subsidy has not been calculated. In particular, the value of land is excluded from cost estimates and the costs of interest and project management are excluded. The costs of management and maintenance, which are recognized as wholly subsidized, are not known. Unit rental charges are (often) not regularly increased in concert with, for example, the cost of living or minimum wage rates. The cost to the citys budgets of rental housing programs is, therefore, not known. Local governments do not have sufficient cost information to decide on the financial feasibility of a rental housing policy or program, Rent Levels. Rental prices should be set in full knowledge of costs, butif subsidy is considered appropriatebased on a calculation of affordability by target groups, and with knowledge of market rental levels.

34

Management. Unit management and maintenance are substandard, despite high subsidies. Practices need to be changed for tenants to be adequately served. Target Creep. It is policy that these public rental units be subsidized for lower income households. Nevertheless, many tenants have chosen to re-let their allocated units at a higher rent (but still, presumably, below cost). Officials recognize that middle-income households are largely capturing the benefits of the rental subsidy, and that the target households benefit only to the extent of the difference between rent paid and rental income. It is widely understood that these limited, costly and discontinuous housing policies and the high costs and risks of the regulatory environment have created an unnecessary gap in the housing market.

5.2
5.2.1

Goals and Design Criteria for New Housing Assistance Programs

Housing Concerns to be addressed

GOI has to address severe constraints in the housing and housing finance market. Approximately 750,000 new households have to be housed in urban areas each year. The cheapest low-income house produced in the market place (approximately Rp.25 million) can only
th be afforded by households at the 60 percentile of the urban income distribution, given the

current cost of finance. Resale markets are thin and with most urban growth happening through immigration of lower income households, upward filtering of households through the housing stock is severely limited. Without effective housing assistance systems, most of the housing requirements for the below median income groups (375,000 housing units per year) will be built in the illegal and non-authorized housing sectors. Current access to land titles, sanitation, water, roads and transport is already inadequate. The reasons can be sought in both market and policy failures. While housing costs appear reasonable in relation to incomes (3 times annual salary is on average required to buy a house) and building materials and labor markets work well, there are critical constraints in the finance and infrastructure markets that need to be addressed either by regulatory and institutional reform or subsidies. The main demand and supply constraints are: Housing finance is expensive because of macro-economic conditions and industry inefficiencies. In addition mortgage lending is not accessible to most households since it requires high down payments, high quality collateral and stable employment and income.

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Lender constraints add other limits to lending to moderate income households: fees for small loans are low, reserve requirements are high, access to funds is limited, foreclosure is risky and costly especially for low-cost properties. Unsecured lending for housing by credit unions and micro-finance lenders is costly and micro-finance lenders are funding constrained. Land and infrastructure markets for low-income housing do not work. Land titling, regulations and administrative procedures add high risk and cost to development, increasing the cost of housing beyond the affordability of the below median income households. For those reasons, an unnecessarily high proportion of urban growth continues to be unauthorized, and happens in informal housing areas without adequate services and infrastructure. Current finance-linked subsidies are unsustainable, inefficient and market distorting. Rental housing for low-income workers is mostly available in the informal sector only. Current public rental programs require extremely high (and mostly hidden) subsidies, are poorly managed and serve a higher-than-intended income group. Capacity at the local government level to address low and moderate housing problems is exceedingly limited. 5.2.2 Possible Goals for National Level Housing Assistance Programs

Based on the analysis of housing demand and supply, three goals are proposed for new housing assistance programs at the national level: Alleviating crisis related and longer-term poverty concerns that can be addressed through housing programs. Poverty can be expressed as a lack of access to adequate sanitation, safe water, access to roads, transport and electricity and other neighborhood services such as security. Addressing new frontiers to improve the efficiency of and access to housing and housing finance markets. Well-targeted incentives for mortgage lenders, investors in rental housing and households may expand the regulated housing market. However, the land and finance sector constraints that currently drive up prices of housing unnecessarily (see discussion in the two chapters above), should be addressed urgently and before a housing subsidy for households at the margin can be effective. If these inefficiencies in the supply markets are not addressed, the subsidies will just pay for those inefficiencies. Enhancing local governments abilities to efficiently develop and improve urban neighborhoods through broad-based housing assistance programs targeted through local governments.

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Well functioning housing markets will stimulate economic growth and housing assistance programs will contribute to this outcome. However, we do not propose to focus housing programs directly towards the goal of economic recovery. Massive government investment in housing construction to stimulate the economy will be too expensive and the outcomes in the current development climate too uncertain, even if funds were available. We rather propose a reform and incentive agenda for the housing market to play a larger role in economic growth. 5.2.3 Design Criteria for Subsidy Design

Following the policy principles outlined in Chapter 1, new housing assistance programs should be transparent, well-targeted, on-budget, administered in an efficient and effective manner, provide incentives for the strengthening of market and public institutions, and be tailored to meet the varied needs of lower-income households in differing circumstances. Programs need to reach the largest number of underserved households, based on the need for fiscal discipline. It is impossible to provide subsidies for the vast majority of underserved households. Subsidies should, therefore, be designed to leverage household, financial sector and local government investment in housing. The allocation system should conform to future decentralization requirements.

5.3

Three Complementary Subsidy Programs for Housing

HOMI proposes three complementary housing assistance programs to address the identified policy goals. A national level home-ownership assistance program through the financial sector for those households who can, with a subsidy, use the regular housing market to obtain a house. The programs should incentive innovations and expand housing finance markets. They should include four components: o A subsidy for households currently at the margin of the finance sector (the 40 to the 55 percentile of the urban income distribution; Rp.750,000 to Rp.1.000,000 per month). Because of the various constraints faced by this group of households several different subsidy instruments need to be designed. o o o Required first-time homeowner and borrower education. A lender incentive system to induce participation by financial institutions. An implementation system that facilitates developer participation.
th th

A flexible neighborhood block grant program through local governments or NGOs, aimed at providing services and infrastructure to areas where unsupported land, infrastructure and housing markets do not yet function. Two types of programs are envisioned, namely block-grants for neighborhood/ home improvement programs, and for

37

mixed new development programs. Income criteria need to be flexible since neighborhoods have mixed income profiles. However, double subsidies, i.e., households receiving both the financial subsidy and a serviced land subsidy, ought to be avoided. It is estimated that the majority of beneficiary households would have incomes below the
th 50 percentile of the urban income distribution. Unaided land and housing markets do

not yet work well at the low-income level, and, therefore, simple credit-related upfront subsidies would not work. Supply side support is needed, complemented with capacity building for local government and CBOs/NGOs. Support to increase the availability of low-cost rental housing, preferably through the private sector. Rental housing construction, particularly for migrant laborers, is a high priority. While the provision of rental housing is mostly a local government and private sector function, national incentives to private employers may facilitate the development of selected rental housing in strategic locations. We will discuss each in turn in the Sections below.

5.4
5.4.1

Homeowner Assistance Programs to Increase Access to Finance

Alternative Housing Finance-linked Subsidy Instruments

Households that are currently unable to obtain a housing loan and, therefore, a market provided house, but who could qualify with some finance-based subsidies, have different constraints: Income constraints, income instability, savings constraint, collateral constraint. There are several types of subsidy instruments that can be used in combination with housing finance to address these constraints. Instruments dealing with income constraints. o Interest-rate subsidy. The interest rate on subsidized loans is reduced in order to make monthly payments more affordable. This is the current KPR subsidy in Indonesia and is not recommended for reasons discussed above. o Monthly payment buy-down subsidy. Part of the initial total monthly payments or the interest-part of the monthly payments on a market-rate mortgage is paid for by a subsidy in order to make loans more affordable. o Up-front lump sum subsidy towards the loan amount. The loan amount is partly replaced with a subsidy in order to bring down the monthly payments Instruments dealing with savings constraints. Saving for the down payment while paying rent is one of the most important hindrances to acquire a house. Subsidies to alleviate savings constraints are therefore considered most effective to increase homeownership for households at the margin, in many countries. However, it is at the same time critical to stimulate savings for home-ownership in order to have homeowner equity

38

in the house. For that reason, none of the instruments dealing with savings constraint, should eliminate the savings requirement completely. o Up-front lump sum subsidy towards the down payment and administrative costs. Part of the down-payment requirement is paid for by a subsidy in order to lower the savings requirements. The subsidy can be tied to a savings requirement. This upfront subsidy has the advantage of being completely transparent. o Mortgage insurance subsidy. The down-payment requirement is lowered by paying for the increased risk to the lender through a mortgage insurance. The premium will be paid for through the subsidy, but the insurance should preferably be nongovernment in order to avoid moral hazard problems. The premium will be higher with increasing LTV ratios. The subsidy can be designed so as not to discourage or replace savings. o A combination of mortgage insurance and upfront lumpsum subsidy towards the down payment. If part of the down-payment reduction is paid for by an up-front subsidy (e.g., 10 percent ) and part can be brought down by mortgage insurance (e.g., 10 percent), the mortgage premium will be lower since the risk that the outstanding loan balance can not be recovered in case of foreclosure, is smaller. Another option is to have part of the subsidy utilized for mortgage insurance and part to lower the loan amount to offset higher loan amounts when down-payment requirements are decreased. Instruments dealing with income instability and collateral insecurity. o A subsidized pledged-account against default. In cases where both the borrower and the lender fear a default situation (the borrower because of the fear of losing the house and lender because of the costs of foreclosure or, for unsecured loans, the fear of losing the cash-flow or even the outstanding loan amount) a pledge account can be set up with a multiple of monthly payments on the loan. This account can be accessed in case of default, in order to guarantee the lenders cash flow and not have defaults accumulate for borrowers with unstable incomes. To discourage lax repayment behavior to access the subsidy upfront, the borrower can be promised the amount left in the pledge account after a specific number of years with a bonus for a good payment record. 5.4.2 Lender incentives

Subsidy programs need to address the constraints faced by lenders to move down-market, e.g., credit risk, limited access to funds, mobilizing long or medium term funds, administrative cost. Several possible measures to address these concerns were discussed in the section on Expanding Housing Finance above, and others can be incorporated into the subsidy program.

39

Some mortgage instruments have features that are especially desirable for lenders. For example, mortgage insurance alleviates credit risk for lenders, may play a role in decreasing reserve requirements for mortgage loans and will increase the desirability of the loan portfolio for leveraging long-term funds against it. Other subsidy instruments mostly deal with credit risk issues, and in general expand the potential lending market for moderate income households. As part of the mortgage insurance subsidy, a deed of trust instrument could be introduced as an incentive for both lender and insurer. A deed of trust will allow the title to be placed with a trustee until the loan is repaid, and will require that the borrower waive his/her rights to a court hearing, speeding up foreclosure procedures and limiting costs. This instrument is used in several Latin American countries. Additional subsidy components may be added to address the high costs of writing small mortgage loans. For example, lenders may be compensated for part of the administrative costs. 5.4.3 Developer incentives

Finance-linked subsidies will increase the demand for housing. However, developers must be able to respond to this demand for moderate income houses and can only do so if supply factors are elastic e.g., if titled and registered land is efficiently supplied and infrastructure is available. If land regulations and procedures hinder the supply of land or make it too costly relative to the target income groups, it may be difficult to have the developers respond to the demand-side housing subsidy. It is, therefore, critical to address the land and mortgage finance bottlenecks before a new subsidy program comes into place. 5.4.4 Comparing Different Housing Finance Subsidy Instruments

We analyze several important dimensions of different instruments according to the design criteria we set out above: Macro-economic risks. The interest-rate and upfront buy-down instruments based on fixed interest-rate loans, are dealing explicitly with the tilt problem (relatively high payments in the early years because interest rates are high in order to incorporate the expectation of future inflation). However, fixed rate mortgages in a volatile macro-economic environment are not desirable as a subsidy instrument. The mortgage insurance subsidy and upfront subsidies can be applied to adjustable rate mortgages. All finance-linked subsidies are vulnerable to downturns in the realestate cycle or other major events causing large scale defaults (e.g., massive lay-offs). Investor and Capital market requirements. In the near future, Indonesia needs to find ways for the mortgage sector to mobilize medium and longer term funds from the capital markets or

40

directly from long-term investors. Mortgage insurance has great additional advantages for the lender and, even more so for the investor in that respect: The mortgage insurance underwriting process will have the effect of providing standardization in the market. Mortgage insurance companies provide a second review of the underwriting decisions by financial institutions, increasing the discipline in the primary market. The mortgage insurer pays only the top percentage of the claim-for-loss submitted by the financial institution. This type of claim payment structure requires the bank to underwrite quality loans. In other words, the bank retains a risk and moral hazard is not increased. Default risk. The up-front grant subsidy and mortgage insurance ease the savings requirements and discipline, and decrease the equity that households have in the house and therefore increase default risk. Mortgage insurance compensates for this by insuring default. The default pledge account subsidy also alleviates default risk. It may decrease payment discipline. Incentives, such as the provision that the household will receive a bonus and may use the amount left over in the pledge account after a fixed period, may prevent such a problem. Transparency. All alternative subsidy instruments apart from the interest rate subsidy require an up-front subsidy payment by the public sector. This is in sharp contrast with the implicit and unbudgeted KPR interest-rate subsidy. Subsidy cost. As an example, keeping the initial loan amount, term, and market interest rates the same, we show in Table 1 the costs of different subsidy instruments on the size of the down payment and monthly payment levels. We then compare these outcomes with the present value costs of the different subsidies. The following conditions were the basis of the calculations: Value of the house, Rp. 20 million; Loan term, 20 years; Interest rate, 20 percent; Down payment, 30 percent of value of the house. We focused on the budgetary costs under a transparent allocation system and did not calculate the implicit benefit of reduced down payments to the borrower. Detailed calculations are provided in the spreadsheet in Appendix 3. We show that the cost of the subsidy can be reduced remarkably compared to the current interest-rate subsidy. However, the alternative subsidy instruments do not reach equally low-income groups, keeping other variables equal. We believe that households earning below Rp. 750,000, may be better served by an integrated neighborhood approach, rather than an individual mortgage finance subsidy. Fiscal risk. All subsidies run the risk that budget allocations will be cut back.

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Summary of Cost Comparison of Subsidy Instruments

Loan Instrument and Subsidy
1.Unsubsidized loan 2. Current KPR interest rate subsidy 3. Lumpsum down-payment subsidy 4. Mortgage insurance for 30 percent of top of loan 5. Mortgage insurance plus lumpsum downpayment 6. Pledge account guarantee

Savings Required
Rp.6 million 30% Rp.4 million 20%

Monthly Income Required

Rp.793,000 Rp.550,000

Subsidy Amount
--Rp.4.5 million

Remarks
Current market terms The down-payment is only 20%; higher credit risk is not carried in a higher rate

Rp.4 million 20% Rp.2 million 10%

Rp.793,000

Rp.2.0 million Covers 20 percent of down-payment and 10 percent of top of the loan The subsidy covers 10% additional down-pmt and mortgage insurance over smaller exposure. A 6-month pledge account was considered a sound time for default insurance.

Rp.1 million

Rp.1.3 million

Rp.2 million 10%

Rp.900,000

Rp.2,9 million

Rp.4 million 20% (the lower downpmt estimate relates to the guarantee)

Rp.906,000

Rp.1.6 million 6xRp.272,000 (pmt/month)

Marja Hoek-Smit, Subsidy Calculations (see Appendix 3)

5.4.5

Recommendations for the Establishment of New Housing Finance Subsidy

Programs and next steps Preferred Instrument(s). Given the relatively modest subsidy cost, its focus on default risk and savings constraint, its transparency and administrative easiness, and the additional institutional advantages of mortgage insurance, we recommend that a new home-ownership subsidy policy focus on mortgage insurance as the most promising direction for Indonesia. We did a special feasibility study, which showed that mortgage insurance could be undertaken in Indonesia and initial calculations were done on the pricing of such product. Initial discussions of the concept with MOFs insurance regulators further confirmed the possibility of introducing mortgage insurance in Indonesia. For non-mortgage based lending (e.g., micro-finance and cooperative loans, lines of credit), the pledge account subsidy is preferred.

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Institutional strengthening of the housing finance sector. One of the main institutional advantages of mortgage insurance subsidies is that insurance is an important step to further professionalize the housing finance sector and make it attractive for long-term investors. Participating Institutions: Three types of institutions are required for such a new housing assistance program to operate well: (a) a government agency to detail the principles, target groups and implementation mechanism and to regularly adjust program parameters; (b) a mortgage insurance agency to implement the insurance component; and (c) financial institutions to underwrite, issue and service the loans, and package the loan and subsidy. A special National Housing Agency is proposed in another section of this report, supported by a housing fund to implement all government housing programs. Such Agency is particularly crucial in the design, supervision and continuous adjustment of finance-linked subsidy programs, which requires a deep understanding of the housing finance markets. A private insurance company, experienced in credit insurance. An existing credit insurance institution (Askrindo), which is in the process of privatizing, could be a possible candidate either for the delivery of MI or as a re-insurer. It has relevant experience in program design to decrease moral hazard issues related to insurance schemes. Participating banks. Several banks interested in moving into the moderate income housing area when that market would again open up, welcome a new subsidy program along those lines. Bank education would be required to introduce a new scheme. Equally, there are a few strong (and many more weak) microfinance lenders who could be engaged in non-mortgage lending. Immediate steps. The Interministrial Committee or a special Working Group under it should study the alternative proposals for finance-linked subsidies. The Working Group should include specialists from the insurance industry and financial sector. If the decision is made to develop a mortgage insurance subsidy, Working Group members should work with an international expert to develop the mortgage insurance instrument, the actuarial/financial system, and the system to manage moral hazard risk for the insurer. At the same time, potential mortgage insurance firms need to be assessed. A subsidy expert (local or international) would work on the design of the subsidy program (setting target groups, target house prices, scale of subsidy requirements, prioritization criteria, lenders participation criteria, etcetera). If an upfront subsidy or a buy-down instrument is chosen, a mortgage design /finance and subsidy specialist should work with the Working Group to design a comprehensive

43

subsidy system, including the household subsidy package, lender incentives and developer support measures.

5.5

Neighborhood Block Grants to Local Governments for Upgrading and New

Mixed Developments
5.5.1 The need for flexibility

Even if all recommendations on the land and housing finance sector will be implemented, the reality is that housing markets will not deliver housing or even serviced land for approximately 50 percent of new households formed each year in Indonesia. While informal settlements have been a solution to this problem in the past and will continue to do so in the foreseeable future, alternatives may be considered now that the rate of urbanization is stabilizing somewhat. considered. Local authorities will be mostly responsible for low-income housing in their jurisdiction, but they are often not equipped to deal with the problem, neither financially nor technically. National government support will be needed in various ways. Local conditions vary enormously with the level of immigration, the size of the city, the type of industrial base, the heterogeneity of the population and the governance tradition. Local authorities also differ in their concern for lowincome housing. Even so, low-income housing problems cannot be meaningfully addressed by the national government directly. National government can provide incentives, guidance and capacity building for local governments and local NGOs to implement locally appropriate housing programs in line with the national housing goals. Inputs by national government have to allow for great diversity of inputs at the local level. 5.5.2 Two proposed local level housing programs
17

Not

only upgrading of existing areas, but more pro-active new housing developments at scale may be

The HOMI team proposes that the national government provides funds for two types of flexible block grant programs: 1. Community-based housing upgrading for existing low/moderate income neighborhoods 2. Mixed-income new residential developments The objectives of he two programs are:

44

To empower community residents to improve the quality of housing and residential environments by means of Direct Community Grants (or BLK). The priority use of BLK funds must be in accordance with local needs as determined through community groups, neighborhood organizations and other institutions involved in a participative implementation process. To assist local governments in formulating innovative programs for housing and residential development, while stimulating critical regulatory improvements that will facilitate the operation of the housing market. Conditions. Both programs are based on the principle of leveraging local governments and communities own inputs. National funds should not substitute local resources. They would further adhere to the principles set out in section 5.2.3. All national level inputs will be conditional upon the local government preparing a simple housing plan for their jurisdiction, and showing a preparedness to deal innovatively with issues related to the supply of serviced land and land titling for low/moderate income households. 5.5.2.1 The Community-Based Housing Upgrading Program (CBHUD) The objectives and principles of the CBHP are similar to the latest, successful KIP upgrading programs. It would be broader in scope in that it emphasizes and contributes to local participation and capacity building, is proposed to have a wider array of improvement options varying with local needs, and is tied to regulatory reform and innovations to facilitate low-income housing delivery. Scope of Program. HOMI recommends that the block grants could be used for: Improvement of physical conditions, such as improvement in neighborhood residential and social infrastructure and improvement and upgrading of housing, and development of infill housing. Institutional development, such as the cost of development NGOs or consultants, administrative costs to operate community fora or community support institutions. Legal and administrative support, such land titling, processing of development controls as well as controls over business, cooperatives, etc. In specific cases, funds could be utilized for community-based productive economic activities, such as small and medium scale businesses and citizens cooperatives, coordination of marketing, and improvement in management skills, etc.

17

Urban growth rates for the next few years are expected to be in the order of 3.5 percent, of which approximately twothird is due to rural immigration. Household growth rates will be higher than overall population growth because household size is gradually decreasing.

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Application requirements and process. Applications should be competitive and take place in two steps. Local governments or other organizations collaborating with local government can submit an initial proposal to a Regional Housing Agency (RHA, the regional representative of the National Housing Agency; see below). The RHA is responsible for initial proposal evaluation, and to make suggestions for modification. If approved, the RHA can, if necessary, provide funds to local governments or communities for the preparation of detailed development proposals. Local government must comply with specific requirements (mostly related to the implementation of land titling and administration issues discussed in section 4.0) and provide their own contributions (e.g., labor, land, services, infrastructure). All costs and contributions should be calculated on the basis of opportunity costs (market value). Final proposals will be judged on their merits to serve low-income communities, efficiency, feasibility, local government and community contributions, and implementation ability. Monitoring. The RHA will monitor the projects and share best practices among local governments and other partners in their jurisdiction. 5.5.2.2 Mixed Income Housing Development Program One of the highest housing priorities is the development of serviced land for new low-moderate income housing, in order to break the vicious circle of unauthorized housing development and delayed delivery of services and infrastructure. Objectives. The Mixed-Income Housing Development Program (MHDP) intends to: Assist local governments in improving their capacity to facilitate development of affordable, innovative new residential areas for low-moderate income groups. Assist varied private, public and NGO actors to develop new low-moderate income residential areas efficiently and effectively. Assistance can be directly provided to households or housing organizations formed specifically for this purpose, or indirectly through Local Government. Scope of Program. The program is proposed to offer two types of incentives: Provide funding to complement local government and, where appropriate, community initiatives to deliver serviced land suitable for low-moderate income housing development. If communities are involved from the start, funding for community support activities in the formulation of housing plans, institutional structures etc will be necessary.

46

Once that step is successfully completed, support can be provided for the implementation of house construction. This assistance will likely take the form of managerial and technical assistance to facilitate access to credit and provide construction support. Selection and monitoring. As with the upgrading program, the RHA will receive initial applications, prioritize and select projects and initiate a staged disbursement of funds when local government and community requirements have been fulfilled. The HOMI report on Community Based Housing Programs provides more detailed suggestions for the development of pilot programs for both CBHUD and Mixed New Development Programs. Detailed costing of the subsidy packages will be further developed in an ADB sponsored pilot project initiated within the next few months.

5.6

Incentives for Local Rental Housing Provision

The justifications for public sector subsidies for rental housing are several and include: Housing public sector workers near their work, where otherwise they would not be able to afford appropriate accommodation; Providing low income accommodations in relatively central areas, where land prices would otherwise be prohibitive; Promoting social integration in urban areas, and Responding to density concerns in large cities in housing types which the private sector has not provided of its own accord. However, the cost structures for public rental housing that we have seen suggest that a considerable subsidy would be needed to undertake a rental housing program for lower income households. We believe that neither national nor local governments will be able to justify high recurrent expenditures on the provision of low-income rental housing, especially where the private sector is active in providing similar housing. We recommend therefore two types of support approaches for rental housing at the national level:

5.6.1

Rental Housing Technical Assistance to Local Government and Other Providers Local governments should be assisted to make an informed judgment about the costs and benefits of providing rental housing, including an analysis of the cost and management implications, and an analysis of the need for such housing.

47

If they choose to proceed with a new rental housing scheme, they should be assisted in the process of designing a scheme, in aspects including costing, pricing and accounting techniques, the selection and retention of tenants, and rental management options (inhouse and contracted out). Local governments may also decide to upgrade existing rental housing and similar assistance could be provided to them for costing and management of the upgrading process. Assistance to local governments should include the provision of manuals and one-on-one technical assistance. The new National Housing Agency (or Kimpraswil) should facilitate the start-up. At a later stage the Associations of Local Governments may be best positioned to provide this type of assistance to local governments. Similar assistance might be provided to employers or private and non-profit investors interested in the development of rental housing. 5.6.2 Incentives for Employer Rental Housing.

Employer-sponsored housing can play an important supplementary role in some circumstances. Local governments should be able to seek advice on incentive packages for sponsorship of employer housing. The NHA would be the institution to consolidate such expertise. Tax incentives of varied type or regulatory support may be ways to stimulate employer initiatives. The Tax issues e.g. double taxation of employer housing benefits should be examined and resolved.
18

18

The double taxation issue has come up in the discussion with regard to the employee housing sponsored by Mattel.

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6.0 SUPPORTING PARTICIPATION PROCESSES

Many of the principles for the housing policy set out above can only be fulfilled if true participation by civic society is in effect. This strategy focuses on supporting and facilitating the process of participation in local level decision-making on housing policies and projects. Secondly, it supports self-management/building of housing and services by individual households or communities. The participatory process should open the opportunity for low-income groups to organize their resources and use these to leverage other public and private resources available to them. Two main constraints need to be addressed: There are few capable community-based and intermediary NGO institutions with experience in the housing field. There is unclarity at different government levels about the possible process of participation in policy decision-making by communities and civil society in general (see section 8.0). The strategy comprises the following institutional arrangements: Institutionalizing and assisting the creation of Local Development Fora: o Provide funding support to establish Development Fora, (initially focused on cities in which housing subsidy programs are developed). o Assist in linking technical professionals with the Fora to improve their ability to provide input to housing and planning proposals. o Train Urban Development Fora members in monitoring development activities. Strengthening community support organizations as part of the housing assistance package: o Fund and train housing related intermediary NGOs in housing and land development issues o Assist Universities to develop housing and land development, short certificate programs. Building the capacity of local governments for participatory planning Details of this strategy needs to be developed in conjunction with the new participatory structures that are being put in place for decision-making on urban development programs and projects (see below).

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7.0 RATIONALIZING GOVERNMENT INSTITUTIONAL CAPACITY IN THE HOUSING SECTOR 7.1 The Changing Government Housing Context

The GOI, especially DGHS/Kimpraswil, MOF, Bapanas and local governments need to be prepared to take a new leading role in the changing housing environment. This strategy seeks to clarify new roles and relationships in the public sector and addresses the capacity building requirements and the need to attract a specialized and well trained workforce. The strategy further seeks to create a single, transparent and predictable housing program coordination and funding process at the central government level. Three initial proposals are prepared by HOMI: Clarifying public sector functions and relationships: Creating a transparent national housing agency and national housing fund Changing role of the existing statutory Housing Agencies: BTN and Perumans

7.2

Clarifying public sector functions and relationships

The national objectives of decentralization and democratization will guide changes in the government housing system. Equally, the current emphasis on market-strengthening approaches will influence the need for government action in the sector. This new focus means that new actors will be involved, new institutions should be founded and new ways to enable the market should be devised. The Housing Law 1992 will have to be amended to reflect these fundamental changes. We have worked backwards, starting from new principles and strategies, rather than from the old Housing Law. We now make some suggestions on changes in the law, in particular as these pertain to the different roles and functions of government. 7.2.1. Roles and Functions of Government

Decentralization is the main strategy for all developmental activity. However, decentralization is more than transfer of decision-making power and control over resources. Decentralization policies should also be understood as a way to enhance the accountability of the local government to the people.

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However, the outcomes of decentralization for the housing sector are by no means clear. Local governments will not necessarily target housing as an investment priority, and in particular housing for low-income households. Indeed research showed that housing was not an important political issue at the local. Local governments often lack housing-related planning, financing and implementation capabilities. Local governments often lack a clear understanding of market operations and how to deal with private sector actors. National level housing institutions and instruments, be they public or private, still need considerable strengthening and require national level inputs, for example to improve the housing finance sector or land titling and registration systems (see our land and housing finance sector recommendations). There is, therefore, a clear role for central government in a decentralized environment: Central government could define incentives to stimulate use of local resources for (national) priority housing programs. Central government could allocate resources for housing to balance regional differences. Central government needs to improve capabilities of national, regional and local housing institutions. Given these concerns, we outline the requirements for a decentralized approach to housing policy and program development, and the funding and implementation of housing programs. The following is a preliminary view of government responsibilities under a decentralized system. 7.2.1.1 Central government functions Develop the legal housing framework. Develop National Housing Policy. Set national multi-year policy goals and objectives guided by an Inter-ministerial Committee on Housing (see below). Develop and monitor national housing assistance programs. Prepare guidelines and conditions for local governments, targeting and allocation systems, prioritization criteria and disbursement procedures. Regularly, adapt program parameters when incomes and market conditions change (see section 5.4.5) Establish a funding framework for housing development and negotiate and secure an allocation from the national budget for housing and DAK funds and seek international agencies loans or grants. Allocate funds to different local governments and financial institutions so that national programs can be implemented.

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Provide technical support for emergency housing in conjunction with other ministries and regional governments and institutions. Manage the (civil servant) public housing stock, and historic building program. Promote housing finance, land and infrastructure sector reforms important to improve the efficient and equitable functioning of housing markets. Assist regional and local government to strengthen their housing planning and implementation capabilities, and their governance abilities and use of participatory planning approaches. Develop guidelines to standardize local government housing institutions, and planning and approval procedures to facilitate housing delivery. Develop and maintain standards and norms. Compile and maintain a National Housing Data Bank and Information System, carry out analyses and dissemination of housing data, publish best practice examples, encourage teaching and research on housing issues at the national and regional level. 7.2.1.2 Regional government functions

Coordinate and integrate regional housing and residential infrastructure programs. Provide training to local governments in technical and governance issues related to housing and residential infrastructure. Provide funding or coordinate funding sources for selected housing programs. Assess applications received from local governments for national housing programs and monitor the performance of local government housing programs. Support regional intermediary NGOs working in the housing sector. Publish and disseminate relevant housing information; conduct building technology research. Provide emergency housing in conjunction with central government. 7.2.1.3 Local government functions

Develop local housing goals and delivery strategy. Facilitate housing developments within its boundaries, guided by the national level policy and regulatory framework. Set aside, plan and manage land for housing development. Enforce location permit requirements. Provide trunk infrastructure services when there are no other service providers. Implement, administer or support national housing programs if accredited to do so. Create a financial and socially viable environment conducive to housing development.

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Support and develop a participatory housing planning system that will help to maximize efforts by households, CBOs, NGOs and the private and public sector to jointly address the low and moderate income housing challenges. 7.2.2 Changing Roles for Government Housing Institutions

The changing government functions and policies require a rationalization of government housing institutions. Most of all, the government sector needs to be professionalized in order to play a lead role in modernizing and democratizing the sector. While HOMI did not conduct a detailed institutional study, we want to suggest the most critical changes required in the current housing institutional framework in order to implement the policy recommendations. 7.2.2.1 Inter-Ministerial Committee for Housing The central housing policy function is divided across various ministries, government agencies. Decentralization will make the policy context even more complex. Yet central government policy guidance will remain critical in the foreseeable future in many key parts of the housing system. Recommendation: The HOMI team recommends that the Inter-Ministerial Committee will be activated to coordinate the housing policy function. Operational issues should be addressed for effective decision-making (e.g., Who can vote, Should consensus be the mode of decisionmaking? Can one participant veto a proposed policy change? Is a simple majority quorum needed for most decisions? Are there different levels of decisions? Do all votes carry the same weight?) We further recommend that subcommittees would be set up reflecting different components of policy and program work; i.e., land, finance, infrastructure, special housing assistance programs, and decentralization concerns. The committee would be supported by an administrative unit. The committee could extend temporary membership to financial sector representatives, trade groups from the real sector and major NGOs involved in community-based housing. Alternatively, these groups could participate in the sub-committees or task-forces. The World Bank has pledged financial support for the operation of the Inter-Ministerial Committee. 7.2.2.2 Kimpraswil and DGHS Recommendation. We propose that the main housing functions of policy development and implementation at the central government level be carried out by different agencies. Policy

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making, capacity building, regulation and support provisions for housing should be carried out by Kimpraswil. Implementation support, fund disbursement, coordination, monitoring and adaptation of special housing programs should be tasked to a special housing agency with a pooled housing assistance fund (see below). We believe this separation to be important in order to improve professionalism in program administration and to increase the distance between the legislative and administrative parts of government as it relates to housing, since civic society institutions are still weak. We suggest that Kimpraswil focus on and strengthen the following functions (see section 7.2.1.1): Develop the legal and policy framework for housing and the National Housing Policy: o Amend the 1992 Housing Law and bring it in line with the overall development direction of the country. o o Change the Housing Decrees required for implementing the new programs. Develop the national multi-year policy goals and objectives guided by an Interministerial Committee on Housing (see below). o As a member of the Board of Directors of the Housing Agency, guide program implementation and adaptation and the development of new housing programs. o Lobby government for housing budget allocations and seek donor funds for housing, and MOF support for borrowing for housing. o Work closely with the Inter-Ministerial committees to promote reforms in the housing finance, land and infrastructure sectors, and in collaboration with professional staff of the proposed Housing Authority. Building housing capacity for the approximately 400 local governments, NGOs and other housing providers: o o A dedicated unit within Kimpraswil needs to be created for this purpose. Provide a training menu for local governments to improve their skills in a variety of areas including: housing planning, financing and implementation capabilities, governance abilities and use of participatory planning approaches. o Develop guidelines to standardize local government housing institutions, and planning and approval procedures to facilitate housing delivery. Set standards and norms for housing: o Develop and maintain housing and residential infrastructure standards, jointly with local governments. o Establish a unit for quality control on housing developed with support from government subsidies. This unit could be part of an existing technical agency. It

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could establish a list of bona fide developers and contractors to support housing project implementation. Compile and maintain a housing data bank and information system: o o o o Establish a dedicated unit for data collection and analysis Collect, analyze and disseminate housing data: financial and real production data. Publish successful practice examples. Encourage teaching and research on housing issues, nationally and regionally.

Provide technical support for special housing programs in conjunction with other ministries and regional governments and institutions: o o o Emergency housing Civil servants housing Historic buildings

7.2.2.3 A Special Housing Finance Unit in MOF The finance sector mortgage lenders, micro-lenders, pension funds, insurance companies, mortgage insurance, capital marketswill play a critical role in extending the reach of the housing market. It is critically important that the government attracts qualified and dedicated staff in this area. HOMI recommends that a core housing finance unit be established in MOF to coordinate housing finance related reforms in MOF. The expert staff of this unit will be represented in the sub-committees of the Inter-Ministerial Committee and be the counterparts to the housing finance experts in the National Housing Agency. 7.2.2.4 Local Government Housing Departments. Local governments should establish a dedicated housing department that will combine all housing functions for moderate income housing. These should help to establish sustainable participatory decision-making structures that include a broad representation of civil society. One of the tasks of Kimpraswil would be to assist local governments to develop well trained and effective housing departments.

7.3

A New Statutory Housing Agency and Housing Fund

7.3.1 Why a new Housing Agency The transition to a sound market-based housing system will require specialized government support. Equally, sustained approaches are needed to improve the living conditions for those households who need special support. We propose to establish a special Housing Assistance Agency for the development and implementation of housing assistance programs for the following reasons:

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Creation of a stable environment for housing sector reforms. The importance of a stable policy environment is critical for that transition. A dedicated housing agency, less prone to short-term changes in ministerial environments, and with specialized staff, can provide such stability. Improved coordination of programs and institutional development inputs. Past subsidy programs were managed on an ad hoc basis. BTN administered the KPR subsidy on behalf of government. Responsibilities for program adjustments and the development of alternative programs have become increasingly vague. Other donor funded subsidy programs are managed by individual project units that are not coordinated. Effective decentralization is impossible to implement under these circumstances. A coordinated approach is required to gradually build up new institutions, regulations and capacities, and streamline different subsidy inputs. Pooling of resources for housing programs. Housing resources from the national budget will be scarce. A housing fund, linked to a housing assistance agency, will facilitate pooling of available resources and maximize outputs for the housing sector. Need for program adaptation to tease the market down and respond to changing conditions. The housing assistance programs we propose are designed to gradually increase the role of local governments, the private and NGO sectors. Incentives need, therefore, to be adjusted regularly to tease the market down. For example, once the market is comfortable making loans to a selected segment of the market, subsidies and target groups should be adjusted to include other risky groups. Similarly, incentives to local government and the NGO sector need to be adjusted regularly to get priority inputs from local partners. This process requires highly specialized professional staff, which understands the interface between the market and government policies and programs. Housing finance professionals are needed for the finance related subsidies. Low- and moderate-income housing and micro-finance specialist are required for other programs. In addition, program adjustments will need some independence of legislative decision-making. Lastly, close coordination of donor investments and technical assistance must occur to implement the menu of priority programs and institutional reforms. These conditions are hard to meet within the context of varied and changing Government Ministries, with limited authority. 7.3.2 Specific tasks of a National Housing Agency Develop priority housing programs for national and local level implementation with inputs from Kimpraswil, local governments, private and NGO/CBO housing actors.

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Set up selection and qualification criteria for financial institutions interested in participating in the financial subsidy programs. Set up a disbursement and monitoring system for financial subsidies. In collaboration with the Board, adjust rates and program parameters (income and other household indicators, loan amounts). Solicit and assist in preparing proposals by local governments or NGOs for neighborhood-based program funding. Select proposals with the assistance of a regional unit, facilitate planning and implementing of projects, carry out quality control and monitor the results. Coordinate program technical assistance and investment inputs by international development agencies. Review the allocation of funds to different programs and adjust according to regional and program related demand. Adjust program parameters and propose alternative programs when economic and housing conditions change. 7.3.3 What might a complete housing agency/fund look like?

At the center of the new system would be a National Housing Agency (NHA) that coordinates all housing assistance programs that would be funded through a Housing Fund (HF). A Menu of Programs. Clearly, under a NHA, just as currently, different subsidy schemes can be developed to cater to different target groups and regions. In addition, priorities must be set, explicitly or implicitly, among different groups and within groups, and regions or local authorities. What would the subsidy programs look like? At a minimum, these channels can be similar to those that exist today, but mostly, new programs such as suggested in section 5 should be considered: a program to pay premiums for mortgage default insurance, upfront grants for down-payments, loan amount, or buying down the monthly payment in initial years, a pre-purchase savings related subsidy in a pledge account, for default prevention, and subsidized infrastructure and services provision through local authorities or NGOs. Allocation of Funds. A HF can be perceived as a pool of money, allocated through annual appropriations for housing programs by the government and international agency and donor funds. The HF administration would allocate those funds to various trust funds for different programs within the HF, specified by the government and approved by the Board and Interministerial Committee, but with substantial flexibility. Most subsidizing activities of the

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government would be funded explicitly by the HF, thereby assuring that the subsidies are transparent. Even more importantly, the future flows of subsidies that are being committed currently, such as the present interest rate subsidies, should be accounted for and funds set aside to cover them. This would represent a critically important departure from past practices. It implies that the hidden KPR subsidy would now be on-budget if the program were to continue. It would further imply that the amount of budget available for additional housing subsidies would be chosen each year by Parliament (previous commitments would be fully funded already) and MOF (for donor funds). This gives fiscal policymakers more control, but also confronts them and the political process with the full future cost of subsidy commitments made today. Transparent and appropriate principles of funding future commitments are essential to a HF. 7.3.4 Legal and Governance Issues

We explored alternative legal structures for a NHA. The NHA might be in the form of a nondepartmental agency similar to BKKBN (the Coordination Agency for Family Planning) or LAN (National Institute for State Administration). It might be in the form of a working group supervised under the Inter-Ministerial Committee, such as TKPP (Coordinating Team for Urban Development). Recommendation: Based on the backgrounds, contexts, and objectives of a new housing agency mentioned earlier, we consider the TKPP-like unit as the most appropriate. Considering that this will be an institution under supervision of the Inter-Ministerial Committee, one might propose that the establishment of the institution will be based on an inter-ministerial decree. However, it has been mentioned earlier that the ministerial institutions may change while a stable housing environment is needed. Therefore, a presidential decree is considered the most appropriate legal basis for the establishment of the NHA. Since the Housing Fund (HF) is a complementary function of NHA, they should be established simultaneously under the same legal basis. The same Inter-Ministerial Committee will also supervise the HF. The NHA/HF operations must comply with various legal aspects of state and local planning and budgeting; among others, the State Guideline (GBHN) mandated by the People Assembly, Law of Autonomy, Law of Fiscal Decentralization, Law of the National Planning Framework (Propenas), Law of Annual Budget (APBN), and Local Planning Framework (Propeda), etc. NHA is controlled by the NHA board of directors that translates primarily the policies set up by inter-ministerial committee on housing into housing programs, but also takes into consideration the inputs from other stakeholders of housing development, into a set of programs. The NHA controls the HF substantively. The NHA gives instructions to the HF for program funding.

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7.3.5

NHA/HF Operations

The fund will have two types of subsidies: explicit subsidies (such as KPR up-front subsidy or mortgage insurance subsidy, etc.) and institutional subsidies (such as capacity building, etc.). The institutional subsidies are commonly understood as a part of the ministerial development budget or sector budget and are partly implicit. The explicit subsidies, however, may have a specific entry in the state budget. Most of the institutional subsidies should also be explicit budget allocations. However, the discussion and negotiation of the explicit subsidies through the legislature is more complicated compared with the implicit subsidies. The complementarity and trade-off between explicit and implicit subsidies should be discussed. Local governments may receive funds for a housing assistance program. According to the fiscal decentralization law, the assistance should be regarded as DAK, a central to local government transfer, tied to specific programs. Local government should, at least, contribute a matching fund of 10%. Many local governments did not include housing in their Five Year Local Development Program Plan (Propeda) and the Five Year Local Government Strategic Plan and will have to get their plans adjusted to come up contributing funds for housing programs. In the long run, local stakeholders should make sure that housing is included in the plans as a priority sector. To stimulate the adjustments and stakeholders initiatives, a scheme of local capacity building is proposed by HOMI. Other local intermediaries, such as NGOs or community groups, may access housing assistance. To ensure that their programs conform to the local development plan and or policies, they should get approval from the local government, before their applications are evaluated by NHA.

7.4

Changing The Role of Existing Statutory Housing Agencies

While not tasked to evaluate the existing statutory housing institutions, HOMI considered the role of BTN and Perumnas in the new housing environment. 7.4.1 BTN

BTN was by far the largest mortgage lender in the country until the 1997 crisis, controlling more than three quarters of the market. As a result of the redistribute effects of IBRAs mortgage sales, the market is now more evenly distributed. BTN is now competing with other equally large mortgage lenders for new market share and for the same type of borrowers. In the current mortgage market place, there is no clear need for a government mortgage bank. The question is whether BTN can develop a special niche in which it can successfully compete with other, more

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diversified lenders, and be gradually privatized, or whether BTN should diversify itself and privatize. There are several constraints to overcome. BTN was recapitalized in 1999 and required to focus on its core business KPR loans, subsidized and non-subsidized, to moderate income households. The uncertainty of subsidy allocations and disbursements has created major problems for BTN in recent years. Consequently, it tried to increase non-subsidized lending and decrease subsidized lending. However, without subsidized liquidity funding, it has to raise its funds in a competitive market place. With low interest income on their government bonds (they were recapitalized mostly with 12.5 percent SBIs) and burdened with a large bureaucracy, fundamental weakness still plague the institution. Competition has forced it into increasingly risky lending, -- lower LTV ratios, lowering rates, increasing construction lending. These risks are not appropriately assessed and priced for. A new evaluation of BTN has just been completed by Price Waterhouse and new strategies will be proposed on the basis of that report. The report is not yet approved for release. 7.4.2 Perum Perumnas

Recommendations. The HOMI-team did not make a detailed analysis of Perumnas, but several discussions were held with senior staff. The following observations may contribute to the current debate. Perumnas, like BTN, was established at a time when developers were not interested yet to deal with the lower end of the housing and infrastructure market. When the new KPR housing subsidy scheme was initiated, Perumnas was to play a critical role. However, over the years the housing development market has changed. Both large scale and small scale developers and contractors construct moderate income housing. New incentives are proposed by HOMI to strengthen and expand that market. A government owned housing developer will not be required and may hamper market expansion. The only possible housing role for Perumnas may be in the construction of emergency housing, although the private sector could be contracted to construct such housing more efficiently. In a decentralized environment, a much scaled-down Perumnas may have a role to play as an infrastructure developer or development consultant for local governments, which do not have access to developers. In the same vein the regional offices could provide capacity building to local governments, and possibly assist in quality control for government assisted housing programs. The emphasis of Perumnas operations would be regional, infrastructure and support oriented.

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TAP4I study of Perumnas. The TAP4I study proposes to transform Perumnas into a National
Urban Development (NUDC) Corporation with three main missions: a public service undertaking, a developer pioneering large scale development, and a self-sustaining state-owned enterprise mission. The consultants favor a restructuring of the existing Perum Perumnas along those lines. HOMIs conclusions and view of the reforms needed in the housing sector are not in agreement with this study. In the view of the HOMI team, this TAP4I proposal only continues the conflicting social and commercial roles of Perumnas that hindered its performance in the past and does not assist market expansion into low-income housing. HOMI sees no role for a NUDC in the current market place. A stakeholder study revealed that main government agencies such as Bappenas, Home Affairs and Finance, do not see a clear role for Perumnas in the new government setting. Kimpraswil indicates that there is a role for Perumnas as the implementation arm of Kimpraswil.

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8.0

CO-ORDINATING GOVERNMENT INVESTMENT IN DEVELOPMENT

We identified the need for a strategy that seeks to maximize the impact of overall government investment in (urban) development, through careful planning and co-ordination of activities. This strategy should be reflected in the new Housing Law. It does, however, go beyond the housing and residential infrastructure sector and is in the purview of Bappenas. One of the requirements HOMI proposes for local governments to receive housing assistance funding is the preparation of a housing development plan, which needs to be part of an integrated development plan. The lack of such a requirement under the current KPR subsidy system has has a negative impact on urban development. The World Bank is preparing an Urban Development Project. HOMI discussed the local level planning and coordinating procedures and institutions for the urban sector with the Urban project team. While there were different views of the appropriate level of decentralization to local government, and civic society participation and decision-making in the formulation of Urban Development priorities, the mechanisms will ultimately be decided by Local Government representative, the Ministry of Home Affairs and Bappenas.

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9.0

CONCLUSION AND PRIORITY ACTIONS

These combined actions for private and public sector improvements outlined in the seven strategies, if implemented in a planned sequence, and assisted by donor funding, should begin to show early and positive effects in different parts of the housing sector and increase the overall production of low and moderate income housing. The most urgent actions are the ones outlined in the section on Institutional Rationalization (Chapter 7). The strengthening of the Inter-Ministerial Committee is urgently needed so it can play its critical role as the champion of the housing sector. The first task of the Inter-Ministerial Committee is to make a decision on the National Housing Agency and Housing Fund. In parallel, strong sub-committees under the Inter- Ministerial Committee need to be set up in areas that need priority action (a) public institutional structure for housing, (b) housing finance linked subsidies, (c) local level upgrading and mixed development incentive programs, (d) housing finance and (e) land regulation. The sub-committees should have representatives from public, private and civic sector, and will be headed by a professional administrator. These committees should study the respective HOMI proposals and make recommendations to the Inter-Ministerial Committee for immediate actions in each area. TORs for technical assistance can be prepared and funds sought for implementation. A clear agenda for action needs to be set. In a second phase, an important task for the Inter-Ministerial Committee is to launch a publicity campaign to show the new housing policy direction, the virtues of the new approaches for all different partners, the market players, local governments and the beneficiaries. Simultaneously, workshops with different stakeholders need to be organized to explain the new housing approach. With the Inter-Ministerial Committee to guide the different reform agendas and a new, professionally staffed National Housing Agency to implement at least some of these reforms, the housing sector will be able to play its critically needed social and economic role in Indonesia.

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Appendix 1 SUMMARY OF MAIN ISSUES RELATED TO DEMAND FOR LOW AND MODERATE INCOME HOUSING Marja Hoek-Smit 1. Drivers of Demand. The analysis focused on factors influencing the demand for housing, i.e., the decision to buy a house rather than rent, in particular for first-time home-buyers, and the decision to pay for housing of a certain price and quality and in a specific neighborhood. The main factors that drive demand are: income level in relation to house-prices and cost of housing, and income stability savings and wealth constraints life-cycle factors housing preferences user cost of home-ownership, in particular financing cost housing risk (the variation of house-prices over time, absence of rent risk) neighborhood externality risk (variation in neighborhood quality/externalities over time) 2. Housing Requirements. Total population and household growth will be focused in urban areas, while rural areas will be stagnant. The urban growth rate for the next few years is estimated at 3.5 percent, of which approximately two-thirds is due to in-migration from rural areas. The overall requirement for new urban housing to house newly formed households for the next few years is estimated at 700,000 to 750,000 units per annum. The high migration component of urban growth has major implications for local governments housing strategies. Migrants are less prone to be homeowners and want to decrease overall housing spending. Urban growth differs in different regions. The highest urban growth rate is expected in the least urbanized regions. Housing assistance programs need to focus capacity building efforts towards those areas. 3. Household Incomes and Income Stability. The current median monthly household
th incomes (50 percentile) for urban areas including and excluding DKI Jakarta are Rp.950,000

and Rp.892,000, respectively. The median household income in rural areas is Rp.579,300. The critical impact of the 1997 crisis has been in the decrease of real wages and not in aggregate employment, since many workers transferred to self-employment. Wage cuts have been greater in the urban sector and are concentrated at the bottom of the wage distribution.

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Household incomes have shown far less volatility during the crisis period than individual wage incomes and overall GDP. Households have coped by having household members move to informal employment and by extending female labor force participation. As a result, the decline in household incomes is about half the size of the decline in individual earnings. Nevertheless, the crisis and the related fall in household income had a major impact on housing demand. One consequence of the crisis is an even higher percentage of selfemployed and family workers (a total of 46 percent in urban areas), which will only gradually be re-absorbed by the labor market. The large proportion of self-employed and family workers will make borrowing for housing through conventional KPR loans even more difficult. Also, an increased sense of insecurity of future income may have a negative effect on the willingness of households to borrow for housing and may influence tenure choice. At the same time, the high labor force participation will negatively affect possible direct self-help involvement by household members. 4. Cost Affordability of Housing. House-prices in relation to incomes are modest and housing standards are not the main concern in the affordability of housing. Low to moderate income households can buy a house for an average price of 2 to 4 times annual salary. Median prices (approximate) for existing housing in predominantly low-income neighborhoods converged around Rp.18 to 20 million in the 10 city survey. KIP areas, which are generally better located and are mostly mixed income neighborhoods, had a median house-price of roughly Rp.44 million, with a median yearly income of Rp.10.7 million (HOMI 10 City Survey, 2001). Cost analysis of new construction in non-complying, but legal areas show that a 21m2, self-constructed house on a 60m2 plot priced in the order of Rp.80,000 to 100,000 per m2 can be built for a minimum of Rp.20 million in main urban areas. Both land and construction prices depend, of course, on location and region of the country. Developer produced moderate income housing can be built for Rp.25 million and above. The lowest cost housing solution is a plot with a core house without infrastructure for Rp.13 to 15 million, depending on location (see Puslitbang 2001 regional construction cost data). Households have a preference for self-built housing and 50-70 percent of the houses in CBHP, KIP and unimproved slum areas are built in this manner. Average housing expenditures dropped dramatically to a low of 14 percent as a result of the crisis, but are returning gradually to pre-crisis levels of 25 percent. Presently, owner

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households spend approximately 20 percent of household income on housing expenditures including utilities, while renters spend on average 16 percent. 5. Finance Affordability. The high interest-rates (20 percent) and high down-payment requirements (LTV of 70 percent) for mortgage lending pose critical limits to housing affordability. Lack of down-payment support may be the most important borrower constraint for mortgage lending. At the medium income level, urban households outside of Jakarta can afford Rp. 13 million in loans and with 30 percent down payment they can afford a house of Rp. 18.7 million. If interest rates of 15 percent are assumed, the same household can afford Rp. 17 million in loans for a total house value of Rp. 24 million. Lender constraints on extending housing finance focus on the high perceived risk of default for low income and non-fixed salaried borrowers, and the high occurrence and cost of foreclosure in case of delinquency. Additionally, the fee income for writing small mortgage loans is relatively low. Consequently, mainstream lenders typically do not make loans for
th houses with a value below Rp.40 to 50 million, affordable only to the 75 percentile of the

urban income distribution. Second-tier regional banks, which have a better understanding of local conditions, make mortgage loans for properties valued as low as Rp.20 million,
th affordable to the 45 percentile. Liquidity constraints are a problem for some banks. When

funds for lending are limited, long-term lending to risky customers on the basis of weak collateral will not be a priority. Lowering the risk of default and foreclosure and insuring the cost of default may assist in getting lenders to move down-market and may increase their access to funds for housing loans. Un-secured micro-finance for housing with current interest rates of over 30 % is important mostly as a borrowing option of last resort (a Rp.2.4 million loan can be afforded by a
th household at the 20 percentile earning Rp.511,000 per month). Micro-finance institutions

can be assisted to improve efficiency and expand access to housing finance. A housing-forsavings program, coupled to incremental construction or improvement for housing may be a useful orientation for a housing program for the lowest 40 percent of the urban household income distribution (Rp.750,000). Self-construction is preferred by low and moderate income households over the smaller RS/RSS turnkey house types (HOMI survey). Investment and savings preferences for housing are low relative to savings for reasons of security for the future and education for the children. These findings are an indication that the house is not considered as an asset that can be utilized to borrow against in case of need.

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6. Housing and Neighborhood Risk. Willingness to invest in housing is related to the perception of the risk that the house will lose value. Current moderate and low-income housing programs often deliver housing that has a lower value than the cost of construction. In addition, a large proportion of houses in low-income housing areas do not have Hak Milik titles or formal permits. Resale of these houses is, therefore, more difficult and investment in housing is discouraged. Much of the housing value is derived from neighborhood quality, i.e., location, availability of infrastructure and services, and social integration and security characteristics. The process of acquiring all development and building permits takes on average a year for low-income areas and is unpredictable. A lack of clarity as to when, or if services will be delivered increases neighborhood risk (i.e., the risk that house values are volatile because of unpredictable neighborhood factors). Investment by (potential) homeowners in more risky neighborhoods is negatively affected and so is lending by financial institutions, which further dampens demand. In addition, lack of access to services (health and education) and infrastructure (safe water, adequate sanitation, access to transport and roads, electricity) are amongst the most critical aspects of poverty. Housing assistance programs need to provide housing that maintains its value and provides a real asset to low and moderate income households. Medium-term implementation plans for the delivery of property rights and infrastructure by local government should be an integral part of low income housing programs. Greater attention should also be given to community strengthening programs. 7. Consequences for Housing Assistance Programs. First, housing assistance programs and particularly programs to stimulate new construction, need to focus on urban areas, since all household growth is expected to take place in cities. Second, since urban growth will be made up predominantly of migrants, rental housing should be stimulated. Third, the demand analysis shows two main types of constraints in extending demand for urban low and moderate income housing: An affordability constraint related principally to the difficulty of accessing housing finance and the high cost of finance. The housing market can effectively deliver housing for Rp.25 million or even Rp.20 million, which is considered sound collateral for a

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loan and sound investment for households, i.e., included in the price of the house are costs related to property titles, regulatory approvals, proper location and infrastructure and services. Housing in this category need not incur a mismatch between cost and value of the house, nor the risks that neighborhood factors impact house-value unpredictably. Financial incentives to households to address savings constraints or constraints related to income level and volatility, may under these market conditions be effective in stimulating both demand and supply of moderate income housing. Equally, assistance to banks to improve risk assessment and some specific credit enhancement incentives may facilitate down-market lending. A housing affordability constraint caused by housing and neighborhood risk. Real markets for low and moderate income housing below approximately Rp.20 million are incomplete and cannot yet price adequately for housing costs and risks, and neighborhood quality and externalities. Finance will therefore not be easily obtained and investments by households are risky since the housing asset has an uncertain value. Clearly, just providing financial incentives to households or lenders would either increase the investment risk for borrowers and financial institutions or would simply not result in new houses being constructed through the private authorized sector. For this segment of the market, a more comprehensive approach to housing assistance is needed. A neighborhood based approach would be required that will provide more direct supply-side assistance, e.g., to provide property rights and regulatory clarity, land in adequate locations and social and physical infrastructure. Given that kind of support, demand for housing may be enhanced through financial incentives, if necessary. In other words, since markets for housing at the lower level do not work well, demand incentives alone will not work to increase housing production, but a neighborhood-based and supplyoriented approach would provide incentives by households and lenders to make further investments.

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Appendix 2

Affordable House Prices for Household Income/Expenditures Percentiles, Using Different Loan Terms
Urban Households 2001
10th% 391,200 536,200 664,200 795,600 948,700 1,152,500 1,455,800 20th% 30th% 40th% 50th% 60th% 70th% 80th% 1,809,400 90th% 2,777,200

Monthly income, based on

Borrowing capacity Monthly pmt.capacity 2 5 7 30% 30% 25% 699,661 2,485,983 5,248,179 10% 699,661 2,485,983 5,248,179 10% 20% 30% 30% 20 20 20% 20% 9,366,476 13,961,123 20 20% 16,960,256 30% 16,960,256 24,228,937

10% 39,120

15% 80,430

20% 132,840

20% 159,120

25% 237,175

25% 288,125

30% 436,740 20 20% 25,708,363 30% 25,708,363 36,726,233

30% 542,820

30% 833,160 20 20 20% 20% 31,952,681 49,043,321 30% 30% 31,952,681 49,043,321 45,646,687 70,061,887

Affordability - term Affordabiity -interest rate Affordable loan

Savings effort/down-payment

Afford w/loan alone

9,366,476 13,961,123

Afford w/Savings

777,401 2,762,204 6,560,224 13,380,680 19,944,462

Household expenditure distribution derived from BPS, National Socio-economic Survey (Susenas), 1999. We adjusted the figures for inflation (an average inflation of 19 percent YoY, applied such that a lower inflator is applied for low-income groups and higher inflator is applied for high income groups). Food, in particular rice, which is the main food expenditure of low-income groups, has not increased in price, hence the differential adjustment.

The total number of urban households is 20,976,584 or 2.01 million in each decile group; 42.2% of all households.

If an urban household growth rate of 3.5% is assumed, approximately 734,000 new urban households will be formed this year, 73,400 in each decile group if the income distribution remains the same (it is likely, however, that the lower income deciles will show a higher growth rate because of inmigration and slower than predicted economic recovery).

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Affordable House Prices for Household Income/Expenditures Percentiles, Using Different Loan Terms
DKI Jakarta Households 2001
10th% 728,100 956,800 1,193,500 1,449,400 1,713,500 2,070,700 20th% 30th% 40th% 50th% 60th% 70th% 2,487,100 80th% 3,125,000 90th%

Monthly income, based on

Borrowing capacity Monthly pmt.capacity 2 5 30% 30% 1,302,206 4,436,010 10% 1,302,206 4,436,010 1,446,895 4,928,900 11,788,057 24,376,518 9,430,445 17,063,563 10% 20% 30% 30% 25,215,964 36,022,806 7 20 25% 20% 9,430,445 17,063,563 20 20% 25,215,964

10% 72,810

15% 143,520

20% 238,700

20% 289,880

25% 428,375

25% 517,675 20 20% 30,472,540 30% 30,472,540 43,532,199

30% 746,130

30% 937,500 20 20 20% 20% 43,920,367 55,185,214 30% 30% 43,920,367 55,185,214 62,743,381 78,836,020

30% 0 20 20% 0 30% 0 0

Affordability - term Affordabiity -interest rate Affordable loan

Savings effort/down-payment

Afford w/loan alone

Afford w/Savings

Household expenditure distribution derived from BPS, National Socio-economic Survey (Susenas), 1999. W e adjusted the figures for inflation (an average inflation of 19 percent YoY, applied such that a lower inflator is applied for low-income groups and higher inflator is applied for high income groups). Food, in particular rice, which is the main food expenditure of low-income groups, has not increased in price, hence the differential adjustment.

The total number of urban households in DKI is 2.208 million or 220,000 in each decile group; 10.5% of all urban households.

If an urban household growth rate of 3.5% is assumed, approximately 77,300 new households will be formed i DKI Jakarta this year, 7730 in each decile group if the income distribution remains the same (it is likely, however, that the lower income deciles will show a higher growth rate because of inmigration and slower than predicted economic recovery).

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Appendix 3

Comparison of Different Mortgage Instruments with and without subsidies

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Appendix 4: FINANCIAL SECTOR & MORTGAGE FINANCE INDICATORS

(in Rupiah 000,000) 1996 1997 532,568 627,32 1 Total Bank Credit Outstanding (Rp.Bill 292,947 378,18 ) 4 Total Bank Credit as % of GDP 55.0% 60.3% Total KPR Outstanding (Rp. Billions) 15,049 17,216 Total KPR as % of GDP 2.83% 2.74% Total KPR as % of Total Credit 5.14% 4.55% Number of Borrowers (000) 1,347 1,566 Total KPR UMUM (Rp. Billions) 12,159 13,185 KPR UMUM as % of GDP 2.28% 2.10% KPR UMUM as % of Total Credit 4.15% 3.48% 786 850 Number of Borrowers (000) 2,890 4,031 Total KPR-RSS (Rp. Billions) As a % of total KPR 19.2% 23.4% 560 716 Number of Borrowers (000) 2,639 3,153 Total Construction Credit Construction Credit as % of Total 0.901% 0.83% Credit Construction Credit as % of Total 17.54% 18.31% KPR 16,338 Total Unsubsidized Lending: KPR UMUM + Construction INDICATOR GDP (Rp. Billion) current prices) 2.78% As % of GDP GRAND TOTAL REAL ESTATE 17,688 CREDIT: ALL KPR + KPR/RSS + CONSTRUCTION Total Credit as % of GDP 3.32% Total Real Estate Lending by Type of Lender % lent by State Banks 52.6% % lent by Private Banks 43.1% % lent by Foreign Banks 2.0% 1.8% % lent by Regional Banks 2.60% 20,369 3.25% 56.9% 38.0% 2.0% 3.1% 1998 989,11 9 487,46 6 49.3% 15,463 1.56% 3.17% 1,521 11,225 1.13% 2.30% 744 4,238 27.4% 777 4,429 0.91% 28.64% 15,654 1999 1,119,44 2 225,133 20.1% 11,688 1.04% 5.20% 1,388 7,762 0.69% 3.45% 633 3,927 33.6% 754 576 0.26% 4.93% 8338 2000 1,290,6 84 269,000 20.8% 11,716 0.91% 4.3% 1,129 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 196 0.07% 1.67 % n.a.

1.58% 19,892 2.01% 60.4% 22.9% 2.6% 5.2%

0.74% 12,264 1.10% 69.3% 31.9% 2.5% 2.3%

n.a. 11,912 0.92% 61.6% 33.4% 2.5% 2.4%

Source: BI statistics, BI special requests by HOMI: Rupiah and Foreign Exchange Commercial Bank Credit Outstanding. Note that for 2000, BI no longer separates KPR UMUM and KPR/RSS; thus, the estimates for KPR/RSS are based on BTNs lending, which accounted for the vast majority of the subsidized lending in 2000. The portion assigned to KPR UMUM is the residual.

Total Mortgage Lending by Type of Bank (Rp. Billion)

Type of Bank Type of Credit KPR/ RSS 1999 KPR CONST UMUM . LOAN 4,440 57.2% 2,542 32.7% 445 77.3% 95 16.5% GRAN D TOTAL 1999 8504 69.4% 2809 22.9% TOTAL KPR 2000 CONST GRAN . LOAN D TOTAL 2000 109 55.9% 70 35.9% 16 8.2% -----* -----195 100% 11,910 1.6% 7529 63.2% 3803 31.9% 279 2.3% 299 2.5% 11,910 100% 100%

State Banks

Total % of Column
Private Banks

3,619 92.2% 172 4.4%

7,420 63.3% 3,733 31.8%

Total % of Column
Regional Banks

Total 135 462 36 633 263 % of Column 3.4% 6.0% 6.25% 5.4% 2.2% Foreign Banks Total -----* 318 -----* 318 299 % of Column ----4.1% -----2.6% 2.5% Subtotal & 3926 7762 576 12,245 11,716 Grand Total % of Column 100% 100% 100% 100% 100% 12,245 Grand Total by Year % of Annual 32.1% 63.4% 4.7% 100% 98.4% Grand Total Source BI, Indonesian Financial Statistics, September 2001 * less than 0.5 billion

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