Indonesia Expat
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Bali’s Development Dilemma: Is a Moratorium the Solution?

Bali’s Development Dilemma: Is a Moratorium the Solution?
Bali’s Development Dilemma: Is a Moratorium the Solution?

Recent headlines have sparked debate about the possibility of a development moratorium in Bali, either partial or full.

Key figures like Coordinating Minister Luhut Pandjaitan, Minister of Tourism Sandiaga Uno, and Bali’s interim governor have all weighed in, as have hoteliers, estate agents, developers, and observers of Bali’s tourism industry. But is a moratorium the right way forward? Is Bali’s development truly out of control? Or is there more beneath the surface? Let’s take a closer look.

The History of Moratoriums in Bali

Bali has seen several moratoriums aimed at controlling overdevelopment, with one of the most notable being in 2011 when the government placed a halt on issuing new hotel permits in the Badung Regency. This was intended to curb the rapid growth of tourist accommodations, which were straining infrastructure and natural resources. However, it had limited success as developers shifted their focus to condotels and villas in other regions like Gianyar and Tabanan.

Following Badung’s example, Denpasar imposed its own moratorium on new hotel developments in 2018, intending to prevent further oversupply in the hospitality sector, encourage investment in other sectors, such as creative industries and education, and alleviate traffic congestion and environmental pressure within the city. Post-COVID-19, there have been discussions about a broader moratorium on new developments, particularly focusing on villas and condotels, which have become a popular option for foreign investors. Unfortunately, the root issues still remain unresolved.

Post-COVID Boom and Challenges

Bali’s tourism and property markets have rebounded dramatically since the pandemic. The island is already seeing pre-COVID visitor numbers, and 2024 is projected to be a record-breaking year. While there was an initial surge in Russian and Ukrainian arrivals for obvious reasons, those numbers are still high but have since normalised.

A significant shift has been the rise of long-term residents, including digital nomads, remote workers, and lifestyle seekers, who now form a substantial part of Bali’s economic engine. In the property market, the trend has moved towards denser developments. Where once a 500-to-1,000-square-metre plot might house a single villa, the same plot is now home to 10 or 20 compact units marketed as ‘villas’ or ‘townhouses,’ with prices often dropping below USD 200,000. It’s worth noting that even though developers see this as tapping into market forces, there are serious environmental and community aspects to consider with this new direction.

Government Struggles to Keep Up

One of the main challenges here is that local government departments are under-resourced and unable to manage the pace of development. Public Works and Housing (PUPR), the National Land Agency (BPN), and the tax office are simply overwhelmed. Better coordination and data sharing between government bodies, as well as streamlined processes, are needed to ensure sustainable growth.

A good example of this is the issuance of building permits (PBG) and activation permits (SLF), both handled by PUPR. However, in between the two, it’s the responsibility of Satpol PP (civil service police) and other departments to enforce compliance, leading to gaps in oversight. It’s easy to see how communication and enforcement are either ignored or undermined against this backdrop. Improved synergy between these agencies is essential and, unfortunately, sadly lacking.

Zoning Regulations and Enforcement

Despite rumours to the contrary, Bali does have a clear spatial zoning plan, known as RTRW, which was last updated in October 2023. Understanding these zones is crucial for developers and investors:

  • Tourism Zones: Designed for resorts, villas, and restaurants, these zones allow for construction on 50 to 65 percent of the land with height restrictions of 12 to 15 metres. Many coastal areas fall under this category, making them prime spots for foreign investment.
  • Mixed Zones: Allow for tourism, residential, and small business developments. Similar to tourism zones in terms of construction limits, they offer flexibility for both locals and foreigners.
  • Residential Zones: Primarily aimed at local residents and come with strict limits on foreign ownership to keep prices affordable for the local population.
  • Farming Land: Non-rice field agricultural land has limited development options, typically restricted to 10 to 20 percent of the land with a focus on natural materials.
  • Green Belts: No construction is allowed, although we can all see violations. These areas are meant to preserve open space and protect the environment.
  • LSD (Rice Field Protection): This is a government programme aimed at protecting rice fields from being converted into other uses to safeguard the nation’s food supply. Exceptions can be made for tourism zones, but the process is complex and rare.

Despite these clear zones, enforcement is often weak, and developers frequently bypass regulations, leading to overcrowded and poorly planned developments.

The Rise of Unqualified Developers

One of the biggest issues in Bali’s property market is the influx of unqualified developers. Many have little to no experience in construction or financial planning, resulting in poor-quality builds, delayed projects, and legal violations. Often, these developers bypass the required PBG (building permits) and go straight to SLF (activation permits), which is not only illegal but also creates a significant loss of potential revenue for the government.

It’s not uncommon for developers to set up multiple companies (PMA structures) to avoid paying taxes. While the PMA system is legal, its current misuse undermines the spirit of Indonesian regulations and deprives the government of crucial income. A common practice is to take advantage of SME regulations and open up multiple PMAs for a project or several projects. Some call that tax planning, which is not allowed in many countries, but under this structure, the developer avoids VAT (PPN). They end up with 0.5 percent corporate tax from revenue rather than 11 percent from profits, which at the end of the day, creates a substantial loss of taxable income from the market they make their profits from. And, to top it off, they complain about the lack of infrastructure, seemingly unaware that they and their developments are a big part of the problem.

The Growing Leasehold Trend

Bali’s property market is increasingly leaning towards leasehold ownership, with estimates suggesting that around 75 to 80 percent of current purchases involve leasehold titles. The most common form is the Hak Sewa, often structured through a combination of private and corporate agreements. This can make it challenging for tax authorities to fully trace business structures and associated taxable revenue.

While some notaries and legal advisors may argue that anyone, including tourists, can hold a lease, this practice raises significant legal concerns; leaseholds were originally designed for short-term use, such as for shops or villas, not for long-term arrangements often spanning decades. The truth is that most notaries in other parts of Indonesia wouldn’t even consider such options that Bali seems to create.

There are several regulated and legal lease options available, such as Hak Guna Bangunan (HGB) on freehold for secure, long-term leasing, and Hak Pakai on top of freehold, which is intended for residential use and provides clearer taxation and zoning compliance. These regulated lease options also require approval from the BPN (National Land Agency), ensuring they align with all legal frameworks.

Think of it this way: if it were acceptable for tourists to walk in off the street and lease a villa for 30 years, and, in some cases, use this as a business and revenue stream, why would the government introduce “second home” visa programmes, which come with strict regulations to govern long-term property use? In my humble opinion, this is the next time bomb waiting to explode for those trying to find loopholes in the law and the same fate awaits as with the so-called ‘nominee structures’ for foreigners who were led to believe they could own freehold titles in the not-so-distant past. Buyers beware!

However, I believe that, with correct regulations and strict enforcement, Bali has room for more.

The Labour Debate: Foreigners Taking Local Jobs?

There’s been much debate about foreign workers in Bali, with some arguing they take jobs away from locals. But I don’t think it’s that simple. The work of the new head of immigration, Silmy Karim, has done a lot to prevent this from happening, but I believe foreign entrepreneurs and professionals often create jobs and bring in much-needed revenue. The economic impact of foreign workers is complex and cannot be boiled down to a simple “locals vs. expats” narrative, despite what social media pundits may claim.

Digital Nomads are another story. Not that long ago there was a push to encourage them to come to Bali, especially immediately post-COVID and some ministers argued for a digital nomad visa, similar to the setup in Thailand. But now the tide seems to be changing with some arguing there are too many, taxes are difficult to collect, and the impact on local communities is not positive.

The Real Issues: Lack of Regulation and Enforcement

The real challenge that Bali faces isn’t an influx of foreign workers or tourists; it’s the lack of regulation enforcement and infrastructure development. Many developers ignore zoning laws, resulting in a chaotic property market that could backfire in the coming years. The solution lies in stricter regulation, better infrastructure, and more government oversight; not in limiting the number of people who come to Bali.

Bali’s future depends on its ability to balance growth with sustainability. The island is not being destroyed by Instagram influencers, but by unethical investors and a lack of government enforcement. To protect Bali’s beauty, culture, and economy, it’s time to take a long-term, responsible approach to development and to diversify into alternative economic sectors and other parts of the island.

For more insights into Bali’s property market, detailed legal advice, and the latest updates on property laws, Seven Stones Indonesia is your partner in growth. Get in touch with us today via hello@sevenstonesindonesia.com we’d be more than happy to chat with you.

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