The “season of scams” has helped place in the spotlight the issue of discretionary allotment of public resources to private interests. Nowhere is this more relevant than in the allotment of large extents of government land to private firms and developers under the guise of attracting investments. At a time when the government of India is revising the existing policy on acquiring land for private projects, it is only appropriate that there be a similar nationwide policy that broadly defines the terms of allotment of any government land to private groups.
Over the past decade-and-a-half, as the process of economic liberalization gathered pace, state governments have aggressively wooed private investors. Preferred areas of investment include manufacturing facilities, information technology and industrial parks, special economic zones, satellite townships and so on.
Apart from fiscal concessions, governments have also offered large extents of land at quite economical rates as an additional incentive to private investors so as to put their state ahead of others. In turn, investors have sought to capitalize on this competition among the states for investments by arm-twisting large extent of land at throw-away prices from state governments.
As always, corruption never lags behind such discretion-based approaches. Unscrupulous fly-by-night operators masquerading as investors, with the active connivance of politicians and officials, have got massive tracts of lands allotted in all the states. The absence of any clear land allotment policy facilitated such practices.
Most of these allotments have been discretionary—made on ad hoc and case-by-case basis, at cheap rates, and without clear conditions of allotment. Huge extents of lands have been transferred in return for vague commitments to create “some” jobs and hollow promises to put the land to use for a specific purpose and time.
A reality check of such allotments across many states shows that only a small share of these lands have been put to any such use. Even when developed, they have often ended up for purposes other than originally envisaged, most often as commercial and residential real estate. The promised jobs have rarely, if ever, materialized. Further, with little skin in the game, the original investors have exited by selling these lands at a grand multiple of their original purchase cost. Now, faced with waves of corruption scandals surrounding such allotments, governments are realizing that they have limited room to manoeuvre in enforcing these weak contracts.
In this context, it is imperative to have a uniform and comprehensive policy for allotment of government lands to private investors. Given recent scenarios, it is important that the policy ensures transparency, pre-empts incentive distortions among stakeholders, and facilitates the achievement of the desired policy objectives of the government.
An effective strategy to manage land allotments would be to sell the land at market price (not the basic registration value) to the investor, escrow the proceeds, and then reimburse a share of it once the investor complies with his contractual obligations. In case of any difficulty in fixing the market value, the sale price can?be pegged on the higher side.?The reimbursement condition would act as a form of performance guarantee.
The extent of land sold can be pre-defined for each sector, based on some objective criteria such as the value of investment or number of jobs promised. The conditions of allotment, including the details of the economic activity proposed, would need to be clearly defined in the contract.
This policy aligns the incentives of all sides to the transaction and mitigates the major failings with the traditional approach. Since the concession is back-ended; conditional on the achievement of contractual obligations, the common practice of developers roosting on large undeveloped land banks can be curbed. If the investor fails to comply with his obligations, the government would still be left with the market value of the land.
Since all transfers are at market prices, this policy brings in much- needed transparency to public land allotments. Since the concession on land price is quantified and predefined, there is complete visibility on the extent of subsidy granted to each investor. Further, since the developer has to cough up the full land value upfront, and would be reimbursed the concessions only on meeting the contractual obligations, the non-committed investors get screened out. Besides, it would provide the government with greater flexibility in customizing incentives.
This approach also converges the interests of both governments and the project financiers. Both want the project to materialize fully, albeit for different reasons. If the developer meets his contract conditions, the government would benefit by way of increased economic activity and new jobs and financiers would have their loans repaid. In addition to his business profits, the developer would receive his land value concession.
In fact, this approach can be extended to cover all forms of government concessions to business investments—tax breaks, utility tariff subsidies, regulatory fee waivers, among others—in various sectors. The terms of any concession that a department wishes to grant should be clearly specified in its policy, and the same can be quantified and reimbursed as credit when contractual obligations are complied with. This will bring in objectivity and transparency to the administration of investment promotion policies across sectors.
Gulzar Natarajan is a cvil servant. These are his personal views
Comments are welcome at email@example.com