How does the new Land Acquisition Act impact the infrastructure sector?

The subject of land acquisition has been a thorny issue, and Infrastructure Today has been closely following the progress of the legislation that the government has been trying to put in place. Balancing the twin objectives (which do not have to be mutually contradictory) of social justice and industrial development has been a tricky act. So what does the legislation actually bring to the table? Are there any lacunae that have to be ironed out? INFRASTRUCTURE TODAY take a close look in the following pages…

With a stable government in place at the Centre, rejuvenating the infrastructure sector is back on the agenda of top policymakers. Unlike in the past, this task is much more difficult this time as the macroeconomic climate is not encouraging. Without structural reforms that can help to ease investment, development and commissioning of projects, a mere expansion of the shelf of projects is unlikely to have any meaningful impact on accelerating investment. Over the last two decades, the word “reform” has tended to register with a positive connotation in the investor psyche, but one must remember that reforms can also be regressive, and can play to the detriment of the economy in the long run. It is in this context, that one must view the likely impact of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013″, popularly called the Land Acquisition Act.

Land availability is one of the core structural issues that impact almost all the infrastructure sectors. In the past, acquisition of land for public purpose had been beset by several issues surrounding processes, procedures and compensation. Under the 120-year old prevailing act, the definition of “public purpose” was never clearly defined, which led to allegations of misuse. In a traditionally agrarian society, land is a source of both livelihood and identity, which were not sufficiently recognised in the prevalent legislation.

The new Act is far-reaching insofar as it attempts to address the social inequities in the existing framework of land acquisition. First, it clearly defines public purpose employing unambiguous vocabulary. It recognises that ownership benefits and livelihood benefits are two different factors that need to be factored in a compensation framework. For the first time, securing a minimum “consent to sell” by landowners is recognised as an important step in the acquisition process. The Act also mandates a detailed diligence exercise supported by a dedicated hierarchy of institutions, including local government. However, in its efforts to plug the loopholes in the existing law, the Act is so thoroughly prescriptive, that its implementability, utility and costs for compliance have been called into question.

The first and most serious issue with implementation of the Act is to do with fragmentation and challenges in establishing ownership. It is estimated that there were 12,000 land-owners for the 1000 acres required by Tata Motors for the Nano project in the infamous Singur case. Unlike in several other countries, the State does not guarantee the unassailability of land titles, despite being an intermediary in the registration process. However, where the government acquires land under existing laws, the title becomes established de novo. This is arguably one of the most important reasons cited by investors for government-supported land acquisition for private projects. The new Act has prescribed a very high threshold for securing a “minimum consent to sell” (between 70 per cent and 80 per cent for projects with private investment) before the government can get involved in this process. In other words, the promoting agency is practically left fending for itself by assuming legitimacy risks, which is a serious problem in several regions of the country.

Second, the Act brings in a new variable called a “market value of the land” that is defined to be the higher of the reckoner rates, average prices of recent transactions in the vicinity and the compensation agreed with the land owners as part of the “consent process”. The effective total compensation would then be linked to a fixed multiple (between 2 and 4 times) of this market value. The consequent steep increase in cost of land has been one of the most widely reported concerns from the investors. However, there are more serious issues, beginning from lack of definition of the terms “recent” and “vicinity”. Speculative trading by vested interests with very small parcels of land can move land prices by a large amount in either direction. Observed land prices are also determined by the land use and development control restrictions prevailing in the area, which are under the control of state and local governments, providing indirect discretionary power to cap prices. Finally, the very process of securing consent from a significant majority of land holders could effectively kick-start a speculative bubble, which can increase the asset prices to unreasonably high values.

Third, the Act has commendably recognised the importance of grassroots institutions like the Gram Sabha, Panchayats and the Collector in a consultative decision making process. While this can bring greater credibility and reduce timelines for reaching consensus, the institutional bandwidth needed from Central and State entities to govern the Rehabilitation and Resettlement (R&R) process seem onerous. In fact, a simple summation of timelines indicated between several sequential steps arrives at an average time of 48 to 60 months from inception of land acquisition to payment of award. The draft of the R&R scheme will have to be discussed with the Gram Sabha and municipal ward, which will also carry out post-implementation social audits through R&R committees. However the Act fails to establish the powers of these project level R&R committees and there are unclear penal provisions against abuse of official power during land acquisition.

Fourth, the R&R package is applicable for all private acquisitions of land over 100 acres in rural areas and 50 acres in urban areas. Most developers lack expertise in the area of rehabilitation or skill training which are mandatory under the R&R process. At an overall level, it may not be prudent to link R&R process to the area of the land concerned, without regard to the number of people affected by the acquisition process. For example, this could lead to a situation where private developers acquire land parcels that are in multiple lots, each under the prescribed threshold for R&R compensation through other entities. There may be several cases where a 50-acre plot displaces more number of people than a 100-acre plot. There are several other provisions of the Act that needs to be detailed out further to understand their implications. For example, it has been stipulated that all infrastructure projects falling under the PPP route should secure a minimum consent to sell of at least

70 per cent. However, one can think of a scenario

where the government acquires land for development of capital projects, and achieves substantial progress in development, before co-opting a private investor. Such a scenario may happen several decades after the acquisition of land. In such cases, this clause can be circumvented in practice.

There are also several inconsistencies that can arise in the application of the Act. For example, India is investing heavily in large infrastructure projects including deep draft ports, large airports and industrial corridors like the Delhi-Mumbai Industrial Corridor (DMIC), the Chennai-Bangalore Industrial Corridor (CBIC) and the Amritsar-Delhi-Kolkata Industrial Corridor (ADKIC). Land acquisition for these projects has to follow the process rigour and timelines under the new Act. At the same time, several sectors like Railways and National Highways are exempt under the Act, insofar as the process timelines are concerned. In other words, as long as the compensation provisions are shown to match or exceed the thresholds under the new Act, they are free to pursue their existing procedures for acquisition.

The present Act is retrospectively applicable for areas where allocation has been made but no development has been carried out for five years. This will give an impetus to present projects which have completed land acquisition but haven't begun development yet. Private players sitting on large tracts of land will now be pushed to develop the land with greater urgency or risk losing it to a government land bank. Developers cannot buy more land as a buffer for projects as done earlier. However, land acquisition is only one element of several risks that can hold up a project. Several downstream issues have held projects back for decades, especially in areas like urban infrastructure. Loss of land acquired at a later stage, will set the clock further back by several years.

In summary, the Act seems to have the right intent in bringing back the balance between development and social equity. In a way, by making land acquisitions more front ended, the Act may actually end up ensuring a greater emphasis on project planning and in ensuring that only viable projects remain in the pursuit pipeline across agencies. Governments and private investors will become more judicious and vigilant in land planning, as well as to ensure optimisation of land pools available with them. However, in order for the Act to genuinely strike a good balance, it needs process, administrative and bureaucratic support from several external agencies. There is a need for extensive institutional reform, downstream reforms to allied laws, greater co-ordination across federal agencies and investor-friendly rules and regulations in downstream implementation of the Act. Unless these fall in place very quickly, enactment of the Act can become a Pyrrhic victory for the government leading to long-term damage to the economy.