Land assembly has always been a contentious issue even though it is well recognized that redeveloping land from the suboptimal to the best possible use can enhance wealth for both owner and society. In most urban development projects requiring assembly of large land parcels, some owners refuse to transfer land because of differences in preferences arising from sentiments and/or disagreement over distribution of land value. If the transaction costs involved (say, in bargaining), are near zero, landowners would voluntarily agree to the exchange and this would be welfare enhancing for all parties. But, this is rather utopian—transaction costs are never zero.
The problem arises in determining the value increment due to combining of fragmented land and in its assignment to owners participating in the land assembly. If it’s a voluntary exchange, each contributing landowner would try to realize the net gains arising from land assembly, and negotiations for the transfer of property will become a stalemate. A third party, such as a developer, would not be able to help either, because even if he offers compensation above fair market value, one or more landowner(s) may hold on in anticipation of a larger premium, knowing that the project would be difficult without their participation.
Governments often resort to acquiring land using their powers under the doctrine of “eminent domain”, which empowers the state to acquire land for public utility, subject to payment of just compensation. Eminent domain, as applied in the US, enables the government to compulsorily acquire land for public projects such as roads, highways, and parks. Although the US supreme court has leaned towards a wide discretion for the state in using eminent domain, there has been opposition to the use of the doctrine for supplying land to private parties. For instance, it took several lawsuits more than 10 years for land to be assembled for Times Square in New York. In Europe, the European Convention on Human Rights gives citizens protection from arbitrary limitation by the state on the exercise of private property rights.
India’s Land Acquisition Act, 1894, empowers the state to acquire land for a “public purpose”. There is a recent Supreme Court judgement (Sooraram Pratap Reddy v. District Collector, Ranga Reddy Distt) on the legality of land acquisition in the Ranga Reddy district near Hyderabad. The land was acquired for use by private entities, which was argued to be in line with the policy to develop Hyderabad as a business destination, for broader, socio-economic, development of the region.
The court provided a wide meaning to “public purpose”, holding that it was wider than “public necessity”, and included acquisition of land by the state for use by private entities. Hence the acquisition by the state government was held to be for a “public purpose”. Although the judgement was strictly in consonance with Indian law, we believe this wide application causes more harm than good.
The outcomes of such acquisitions are usually “suboptimal”, challenged in court, and marred by huge enforcement costs. There are issues of efficiency because, in government-led acquisitions, market mechanisms don’t work and compensation depends on the political situation. Further, fair market value does not reflect the value of assembled land and this creates no incentive for owners to cooperate.
There is also an equity issue. The financial benefits of land improvements—increased property values —may spill over to the adjacent neighbourhood. If those whose lands are taken are not entitled to this price appreciation, why do those whose properties adjoining the project are not taken get to retain it? The argument that the value gains for the latter are captured through higher property taxes is weak, as tax rates are not high enough to make it equitable.
Is there an alternative to eminent domain? Yu Hung Hong, fellow at the Lincoln Institute and co-author of a book on the theme, argues for land readjustment.
The principle behind it is instigated “land-for-land” swapping or property rights exchange. Private owners are provided serviced land of similar value to what they part with. When an individual’s interest in property is in conflict with the community at large, the first resolve is to build consensus through negotiation and persuasion. Coercion should be employed only if all options are exhausted and the parties have failed to compromise.
Land swaps have been tried in some road widening projects under the Land Acquisition Act in India. But, given the weak institutional design, private owners often lose out.
Land readjustment has been successful in Japan, Israel, Germany, Hong Kong, among others. Participation of all involved—the public, government agency, developer and political leaders—is key here. These countries have favourable institutional conditions, too. Israel has tightened the definition of public use, which has limited the government’s role in acquisition. In Japan, rights of private owners are very strong and courts uphold private property protection. Land readjustment is the only viable option. Take, for instance, the Lai Sing Court apartment complex in Hong Kong, where the government did not collect any impact fees from developers to support the redevelopment. The incentive was so high that developers were willing to share profits and negotiate with participating owners. Owners also received relocation compensation, an apartment with close resemblance, on the same floor and at the same orientation. Land readjustment works better than compensation for compulsory purchase as it allows the original owners to benefit from the financial gains generated by the project.
India needs to seriously revisit the land acquisition paradigm if it wants to avoid further Singurs.
Piyush Tiwari is senior lecturer, University of Aberdeen, Scotland. Shashwat Tewary is a lawyer with an interest in Indian constitutional law and governance. Comment at email@example.com