Legal development

Amendments to Indonesia's new capital city law (Law 21 of 2023) 

building work and cranes

    On 31 October 2023, the Indonesian House of Representatives (DPR) officially enacted Law No. 21 of 2023 on the Amendments to Law No. 3 of 2022 on the State Capital City (Law 21/2023). The Minister for National Development Planning, Suharso Monoarfa, aptly summarised the purpose of Law 21/2023 as "needed to provide a legal basis for accelerating activities for the preparation, development and relocation of the State Capital, as well as the administration of the Special Regional Government for the Nusantara Capital City more effectively, optimally, accountably and of course sustainably."

    This update follows our previous article on this topic: "Nusantara Latest developments of Indonesia plan to move capital city".

    Law 21/2023 brings several key changes to the Nusantara Capital City regulatory framework as follows:

    • Determination of regional boundaries:
      Law 21/2023 sets updated geographical coordinates of the Nusantara Capital City. In general, the total land area of the new capital city has been slightly reduced from 256,142 Ha to 252,660 Ha1 with the Nusantara Capital City central government core area decreasing from 56,180 Ha to 56,159 Ha and the "development area" from 199,962 Ha to 196,501 Ha.
    • Optimizing the Nusantara Capital City Authority:
      The Nusantara Capital City Authority (NCCA) is a cabinet level-agency formed to manage and govern the future capital. Importantly, its role has from the outset included providing investment licensing / facilitation within Nusantara and regulating land rights.

      Law 21/2023 expands the authority of the NCCA by granting it special authority over central government affairs and regional government affairs in the context of carrying out the preparation, construction and relocation of the new capital, as well as the administration of the Special Regional Government for the Nusantara Capital City. The NCCA is now also granted the power to establish norms, standards, procedures and criteria in relation to the above activities. Previously, Law 3/2022 stipulated that provisions on the special authority of the NCCA would be regulated in a Government Regulation following consultation with the DPR. However, Law 21/2023 now allows the Head of the NCCA to directly issue regulations in relation to its authorities.
    • Spatial Planning:
      Law 21/2023 states that the use of space on every plot of land within the boundaries of the Nusantara Capital City area must be in accordance with the applicable spatial planning. However, the NCCA now has the authority to reorganize land within the Nusantara Capital City area through the following mechanisms:

      a. procurement of land for development in the public interest, direct procurement of land, and/or reallocation of the land's purpose in the event that the land is not in use; and

      b. land consolidation2  in the event that the land is used, in accordance with the applicable spatial planning provisions.

      The funding required for the land reorganization must be proposed to the President and can be allocated in the State Revenue and Expenditure Budget (APBN).

      Furthermore, Law 21/2023 allows for the Nusantara Capital City National Strategic Area (KSN)3  to be reviewed and changed according to the needs of Nusantara Capital City.4
    • Status of land ownership and rights over land:
      Importantly, Law 21/2023 introduces two new provisions regarding land which clarifies that land in the Nusantara Capital City consists of:5

      a. State Assets - land related to the administration of Central Government affairs and over which land use rights (hak pakai) can be granted.

      b. Assets belonging to the NCCA - land that is not related to the administration of Central Government affairs and over which rights to manage (hak pengelolaan) are granted by the Central Government to the NCCA. Right over land (hak atas tanah or HAT) in the form of business use rights (hak guna usaha), right to build (hak guna bangunan), and right to use (hak pakai) can be granted on the lands with rights to manage of the NCCA. Furthermore, the NCCA may relinquish its rights to manage these lands back to the Central Government.

      NOTE

      - In the case of a HAT in the form of a business use right (hak guna usaha), it is granted for a maximum period of 95 years for the first cycle and can be re-granted for a second cycle with a maximum period of 95 years.

      - In the case of HAT in the form of right to build (hak guna bangunan) or a use right (hak pakai), it is granted for a maximum period of 80 years for the first cycle and can be re-granted for a second cycle with a maximum period of 80 years.6

      The process and requirements for the granting & re-granting of HATs will follow the prevailing lands laws and regulations.

      c. Community owned land - land with HAT in the form of property rights, business use rights, right to build, right to use, and land controlled by the entitled party.

      d. State land.

      These new provisions regarding the status of land ownership and rights over land introduced by Law 21/2023 provide clarity since previously, Law 3/2022 did not regulate this important topic for the development of the Nusantara Capital City which is critical for investors to understand the nature and basic terms of the rights they may be able to secure over the sites for future developments and projects. Also, whereas it was previously unclear whether the land in the Nusantara Capital City can be encumbered and granted to third parties, Law 21/2023 now establishes that HATs can be granted over such land under rights to manage (hak pengelolaan) of the NCAA which then allows for these rights to be used by/assigned to third parties and also be encumbered as security.
    • Funding:
      Law 21/2023 states that funding for the preparation, development, and relocation of the State Capital, as well as the administration of the Special Regional Government for the Nusantara Capital City is to be sourced from:

      Amendments to Indonesia's New Capital City Law funding diagram


      Law 21/2023 also introduces a new provision on debt financing, which provides that debt financing for the Nusantara Capital City consists of:

      Amendments to Indonesia's New Capital City Law debt financing diagram


      Debt financing for the Nusantara Capital City may be used to finance the preparation, construction and relocation of the State Capital, as well as the administration of the Special Regional Government for Nusantara Capital City. The Central Government can provide guarantees for the debt financing of the NCCA. The provision on debt financing is a new provision brought by Law 21/2023, which was not yet present in the original Law 3/2022 which reflects the central government's desire to ensure that this new capital city project is able to obtain sufficient funds to allow it to sustain itself financially into the future.
    • Income and Expenditure Budget & Reporting:
      Law 3/2022 already provided that the Head of the NCCA must prepare an annual Work Plan and Budget (or Income and Expenditure Budget for the Nusantara Capital City if it obtains income from other legitimate sources). However, Law 21/2023 now provides that such Budget must first obtain approval from the President after discussions with the DPR.7  Law 21/2023 also provides that the implementation and accountability of the Nusantara Capital City Budget must be reported to the President.8
    • Accelerating housing implementation:
      Law 21/2023 states that the NCCA is responsible for administering housing in the Nusantara Capital City.

      Furthermore, incentives are to be given to business actors in the housing sector who carry out development of balanced housing (hunian berimbang) obligations9  in the Nusantara Capital City.10  In order to accelerate the provision of balanced housing in the Nusantara Capital City, the Head of the NCCA may propose the use of balanced housing conversion funds to the Minister of Public Works and Housing.

    Transitional Provisions:
    Based on the transitional provisions of Law 21/2023, Law 3/2022 is to remain in effect as long as its provisions do not conflict with Law 21/2023. However, acts under Law 3/2022 must be adjusted no later than 2 months after Law 21/2023 is promulgated.11  In practice, this means that all acts (for example the existing spatial plan) that were carried out based on Law 3/2022 must now comply with Law 21/2023.

    Conclusion

    The revisions to Law 3/2022 on the State Capital City aims to strengthen the Nusantara Capital City institutions (while ensuring supervision by the President and DPR) and provide certainty in several important aspects including funding, land procurement and rights, and housing.

    It must be noted that the amendments brought by Law 21/2023 will require several implementing regulations to be issued by the Head of the NCCA, such as on land reorganization (i.e. changing the spatial planning granted by the Central Government), and housing incentives. Nonetheless, the amendments brought by Law 21/2023 are meant to deliver a strong message that the current Indonesian government is committed to the new capital city project despite recurring uncertainties and speculations about the feasibility and perennity of the project, especially in light of the upcoming general elections in Indonesia in February of 2024. Time should soon tell the direction of travel for this gigantic enterprise which is meant to reset the center of gravity of the Indonesian archipelago.

    "Ashurst can provide advice across international and Indonesian law because of its Jakarta office. Even the international lawyers are fully across all the relevant Indonesian laws. The whole team works very well across their offices - Ashurst and Oentoeng Suria & Partners operate as one joined-up team that can cover all aspects of advice on our major energy transactions and projects."
    - Chambers Asia-Pacific Indonesia, 2022


    Authors:
     Frédéric Draps, Partner; Dan Trevanion, Foreign Legal Consultant; Khairunissa Yuliandhini, Associate; and Rachelia Jumanti, Junior Associate. 

     

    1. Article 6 of Law 21/2023.
    2. Defined in Head of National Land Agency Regulation No. 12 of 2019 as "the policy of restructuring control, ownership, use and utilization of land and space according to spatial planning as well as efforts to provide land for public purposes in order to improve environmental quality and maintain natural resources by involving active community participation".
    3. KSN is defined in Article 1(12) of Law 3/2022 as a special area whose area coverage and function are stipulated and regulated by Law 3/2022.
    4. Article 15 of Law 21/2023.
    5. Article 15A of Law 21/2023.
    6. Article 16A of Law 21/2023.
    7. Article 25 of Law 21/2023.
    8. Article 26 of Law 21/2023.
    9. As a note, pursuant to Government Regulation No. 14 of 2016, as amended by Government Regulation No. 12 of 2022, business entities carrying out housing construction are obliged to create housing areas with balanced housing (i.e. housing that is built in a balanced manner between simple houses, middle-class houses and luxury houses).
    10. The specific incentives are not set out in Law 21/2023. This would be further regulated in a Regulation of the Head of the Nusantara Capital City Authority.
    11. Article 42 of Law 21/2023.

    Oentoeng Suria & Partners (OSP) is an Indonesian firm affiliated with Ashurst, a global law firm.  The Ashurst Group comprises Ashurst LLP, Ashurst Australia and their respective affiliates (including independent local partnerships, companies or other entities) which are authorised to use the name "Ashurst" or describe themselves as being affiliated with Ashurst, such as OSP.  Some members of the Ashurst Group are limited liability entities. Information about OSP can be found in www.oentoengsuria.com, and further information on which Ashurst Group entity operates in any country can be found on our website at www.ashurst.com

    This material is current as at 5 December 2023 but does not take into account any developments to the law after that date. It is not intended to be a comprehensive review of all developments in the law and in practice, or to cover all aspects of those referred to, and does not constitute legal advice. The information provided is general in nature, and does not take into account and is not intended to apply to any specific issues or circumstances. Readers should take independent legal advice. No part of this publication may be reproduced by any process without prior written permission from Ashurst. While we use reasonable skill and care in the preparation of this material, we accept no liability for use of and reliance upon it by any person.

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