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Large scale infrastructure projects & the Act

Large scale infrastructure projects & the Act

The new legislation has showcased the fact that land is a scarce resource. The key learnings from the implementation of the Act will help in improving future legislation in this crucial area in the coming years.

The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, which replaces the century-old Land Acquisition Act, 1894, proposes a unified legislation for acquisition of land and adequate rehabilitation mechanisms for all affected persons.

Need for government to acquire Land

As per the new Act, private owners can acquire land directly and the rules of the Land Acquisition Act does not directly apply but only the rehabilitation and resettlement aspects of the act kick in. This is an important point as the government feels that in the past, the land acquisition act has been misused by its own departments and ministries (both at the State and Centre) for various reasons and landowners/ project-affected people have had little say in the process. This leads to the important question on why private companies would want to approach the government when they could directly acquire land by paying the market rate. The most important benefit that the private companies get if the transfer happens through the government is clear title of land. This factor is a critical element as you would observe later that the cost of land is only 3-5 per cent of the overall project cost but if the title of the land is questioned then the whole project would fall into jeopardy.

Component of land cost in project cost

In the case of infrastructure projects and large manufacturing projects which need land on a large scale, the land cost is usually in the range of 3-5 per cent of the total project cost. The new A ct will double the land cost and hence the net impact on the cost will be about an additional 5 per cent to the total project cost. While this is significant, it may not entirely affect the project’s viability and feasibility as the company can also tweak its pricing appropriately.

Projects in which the land cost is a significant cost, i.e., more than 10 per cent of the project cost, this Act can have a serious negative impact. The share of land cost in the total project cost doubles which in turn makes the project become unviable. Added to this additional impact, in the case of traditional project finance for manufacturing companies, land cost is not usually considered as part of the project outlay and banks do not fund for it. This means that the owner’s equity for the core project has to increase which in turn adds strain to the project’s viability.

Cases where the Act could exercise a negative effect are those related to affordable housing, logistics sector, large-scale solar farms, wind farms, etc.

Project timelines and uncertainties

In a competitive world, capital moves across countries and can set flight to the location where it is much appreciated and put to use immediately. Given this backdrop, investors who plan to invest billions of dollars do so in the hope of seeing the results of their commitments coming through in a specified time-frame. However, the risk reward for these large infrastructure projects does not stack up if the basic land is not made available to these companies. With the implementation of the new Act, there is a real risk of this coming true, i.e., governments not being able to acquire within a specified time frame, some of the aspects of the Act which lead to this situation are:

1) Consent Clause: Consent of 80 per cent of the specified affected families is needed – It is normal even now for land records to not be updated; thus the person who is really affected may not be the owner on paper. Hence it is left to the company to hunt for the owner and effect this change in the records and then take consent. On the ground, this can be a herculean task for the government and companies.
2) Traditionally land appreciates in value over a period of time and more so when development is expected to take place. With the new Act the overall process is expected to take time, hence people who had given consent initially can change their minds and thereby have a negative impact on the overall outlay for the land cost by way of additional compensation and – developers/ companies can get into a vicious circle with the land-owners on firming up their compensation amounts.
3) As consent has to be sought from the land-owners, it could so happen that 80 per cent of the people could own 20 per cent of the land and thereby have a significant say in the acquisition of the whole land.
4) To comply in letter and spirit, the rehabilitation and resettlement process can consume quite an amount of time (3-5 years) and little efficiency can be brought in this aspect. This procedural aspect and any delay therein can have a significant impact on the viability of the project and in some cases question the utility of the project.

Magnitude of loss for government and project proponent

Infrastructure projects are critical for the development of the country and different regions of the State in particular. Delay in implementation and execution of a project has enormous direct and indirect cost. The direct costs are quite evident from the non-operationalisation of the project. The indirect costs can cause a setback for the development process. The key indirect costs are in the nature of indirect employment, associated investment in support infrastructure etc. and usually the ratio is 1:2, i.e., the indirect benefits are twice that of direct benefits. The loss in revenue due to the delayed/non-implementation of the project in terms of direct, indirect taxes and levies therein can be significant as the project life of infrastructure projects are upwards of 30 years.

Different Horses for Different Courses

Given the federal structure of our government and land being a State subject, it is difficult to implement a uniform law. Also by implementing a uniform law, some States may gain and some lose. Also States are in different phases of the growth trajectory and hence it is important that special impetus is given to certain States and moderation observed in other cases. The current Act gives the liberty to the State to provide compensations that are better than those specified in the Act. Instead of setting a floor, a range can be set and the States can be given the freedom to devise compensation mechanisms to suit the region where they would like to provide the impetus.

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