The Indonesian government is accelerating efforts to introduce alternative infrastructure financing mechanisms through a new land value capture framework designed to reduce dependence on state and regional budgets while strengthening local economic development.
Through the Coordinating Ministry for Economic Affairs, the government has begun socializing Coordinating Ministerial Regulation (Permenko) No. 3 of 2026, which establishes operational guidelines for infrastructure financing under the Land Value Capture (LVC) scheme, officially known in Indonesia as Pengelolaan Perolehan Peningkatan Nilai Kawasan (P3NK).
Authorities believe the financing framework could become an important solution for regional governments facing growing fiscal constraints while still being expected to deliver large-scale infrastructure development projects.
Under the mechanism, local administrations will be allowed to capture part of the increase in land value generated by infrastructure development projects and redirect those gains toward future public investment.
Officials say the approach could create a sustainable source of infrastructure funding while encouraging regional governments to become more financially independent.
Acting Deputy for Industry, Manpower, and Tourism at the Coordinating Ministry for Economic Affairs, Dida Gardera, said the scheme was specifically designed to provide an alternative financing option amid increasingly limited fiscal capacity.
“The financing scheme through land value capture can become an alternative solution amid government fiscal limitations,” Dida said in an official statement released Wednesday.
“This P3NK mechanism is designed to utilize regional value increases as a source of infrastructure financing. Through this mechanism, development not only creates benefits for the public but also generates new sustainable funding sources.”
The policy marks one of Indonesia’s latest efforts to diversify infrastructure financing as the government seeks to maintain economic growth, expand public facilities, and support regional development without placing excessive pressure on national and regional budgets.
Indonesia has pursued aggressive infrastructure development over the past decade, including toll roads, ports, airports, industrial zones, railways, water systems, and urban transportation projects. However, financing demands have continued to rise while fiscal pressures have intensified due to slower global economic growth and higher government spending obligations.
The Land Value Capture framework is intended to help close part of that financing gap.
Under the system, public infrastructure projects that increase surrounding land values can generate additional economic gains for nearby property owners and businesses. The government’s new framework seeks to capture a portion of those gains and channel them back into public infrastructure funding.
The regulation outlines a full financing cycle beginning with planning, followed by value creation, value capture, and finally reinvestment into additional public projects.
Officials say the framework provides clearer operational guidelines for local governments to implement area-based financing mechanisms in their respective regions.
The regulation also allows regional administrations flexibility in selecting institutional management structures depending on local conditions and governance capacity.
Implementation may involve regional work units, public service agencies, or regionally owned enterprises.
Importantly, the P3NK mechanism is categorized as an alternative financing model outside the traditional State Budget (APBN) and Regional Budget (APBD) structures.
The government views this as a crucial step toward increasing local participation in infrastructure financing and reducing overreliance on central government funding.
According to the Coordinating Ministry for Economic Affairs, most infrastructure investment projects in Indonesia are located outside Jakarta and other major metropolitan areas, meaning regional governments play a critical role in driving national economic expansion.
Officials say local administrations are expected not only to facilitate investment but also to prepare bankable projects, develop innovative financing mechanisms, and strengthen cooperation with private-sector investors.
“Regional governments are encouraged to become new sources of economic growth so that national growth is not concentrated only in certain regions,” Dida said.
“Increased investment in the regions is expected to create multiplier effects including job creation, stronger business activity, and broader economic empowerment for local communities.”
The government believes the LVC framework can support more balanced regional growth while also improving the long-term sustainability of infrastructure development.
The socialization program itself is part of the implementation process for Presidential Regulation (PP) No. 79 of 2024 concerning P3NK.
The initiative aims to provide central and regional governments with a comprehensive understanding of how strategic infrastructure financing can be implemented through the land value capture mechanism.
Authorities are encouraging regional administrations to begin identifying pilot projects that could be developed using the new financing framework.
Officials hope successful pilot programs could eventually serve as models for wider national implementation.
“We hope regional governments can begin identifying potential pilot projects in their respective areas so they can later be followed up together with the Coordinating Ministry for Economic Affairs as part of efforts to create innovative and sustainable infrastructure financing,” Dida said.
The adoption of land value capture financing also aligns Indonesia with broader international infrastructure financing trends.
A number of countries have used similar mechanisms to help fund public transportation systems, urban renewal projects, industrial zones, and housing development.
Land value capture models have been implemented in various forms in countries including Japan, South Korea, Singapore, China, the United Kingdom, and the United States.
Such systems typically rely on the principle that public infrastructure investments increase nearby property values, allowing governments to recover part of the resulting economic gains through taxes, fees, development rights, or special assessments.
Indonesia’s government believes the mechanism can become particularly important as urbanization accelerates and infrastructure demand continues rising across the archipelago.
The country faces major financing needs in transportation, energy, water systems, digital infrastructure, logistics, and public services, especially in rapidly growing regions outside Java.
The government has repeatedly emphasized that infrastructure development remains central to Indonesia’s long-term economic transformation strategy.
At the same time, authorities are increasingly seeking ways to mobilize private capital and local financing capacity rather than relying solely on public spending.
The new land value capture framework is also expected to support stronger collaboration between government institutions and private investors by creating clearer financing structures tied to economic value generation.
By linking infrastructure projects with rising land values, policymakers hope the mechanism can improve project sustainability while attracting more long-term investment participation.
Nevertheless, implementation challenges remain.
Regional governments across Indonesia vary significantly in terms of administrative capacity, technical expertise, financial management, and institutional readiness.
Some regions may face difficulties in accurately assessing land value increases, structuring financing models, coordinating stakeholders, and managing long-term project execution.
Legal certainty, governance standards, and transparency will also become critical factors in ensuring successful implementation.
The government is expected to continue providing technical guidance and support as local administrations begin exploring pilot programs under the new regulation.
Economic policymakers view the initiative as part of a broader push to modernize Indonesia’s infrastructure financing ecosystem while creating more resilient regional economies.
If implemented successfully, the land value capture model could eventually become a major component of Indonesia’s long-term infrastructure development strategy while reducing fiscal pressure on both national and regional governments.
