The trouble with land(4)

As Infrastructure Investor learned during its visit to New Delhi, the many problems of land acquisition in India illustrate why good politics is essential if infrastructure projects are to succeed socially as well as financially.

So profound is the impact of infrastructure on people’s lives that the provision of infrastructure assets is always and everywhere a highly political endeavour. Investors in infrastructure forget at their peril that to focus on maximising financial return only is to blunder strategically. Failure to take into consideration the interests of just one set of stakeholders in a project is likely to have severe consequences, among them delays, bad PR, spiralling costs and litigation. What’s needed is a holistic approach that assesses the expected costs and benefits of a project for everyone – right from the get-go.

Helping investors avoid excessive emphasis on internal rates of return is a job for government, which must provide clear yardsticks on what can and cannot be done. When interests clash, it may also have to intervene. When and how are contentious issues in their own right. But even if the playing field is straightforward and well understood, anyone seeking financial gain from an infrastructure project must understand the political context it is imbedded in, or else there will be bumps in the road. There are countless examples to illustrate this fact of life in infrastructure perfectly, but this week we came across a particularly telling one.

We were in New Delhi, at a launch event hosted for Infrastructure Investor by Indian infrastructure manager IDFC. On the agenda was a panel discussion on land acquisition in India, an issue that is at the root of many of the difficulties affecting the country’s plans for infrastructure. According to the India Infrastructure Report 2009, a 284-page document studying the issue, 70 percent of the 190 projects that are currently delayed in India have fallen behind schedule because of land acquisition problems. What is more, 81 percent of those responding to a survey conducted by the Confederation of Indian Industry said land acquisition was the biggest impediment to infrastructure project implementation. For a country so dependent on far-reaching improvements to its roads, power plants, ports, schools, hospitals and airports, this is a problem that matters enormously.

India has a poorly functioning land market, with badly maintained title records and a distorting system of rules and regulations governing the use of land. Price discovery is difficult, and regulatory arbitrage is commonplace and often highly profitable. The land-trading mechanisms in place today are so messy that private sector promoters of infrastructure projects too frequently rely on the government to purchase the requisite land for them, which is inherently inefficient and also raises questions of fairness. Moreover, land owners and users affected by land acquisition have often been compensated poorly, and India’s legal framework for rehabilitation and resettlement (R&R) of displaced people is inadequate as well.

With many Indians lacking the skills needed to survive without land, these shortcomings add up to a desperately problematic state of affairs. The government is working on the necessary remedies; both the Land Acquisition (Amendment) Bill, 2007, and a draft Rehabilitation and Resettlement Bill are pending in parliament. Market practitioners say both documents are heading in the right direction but do need more work, and it is not clear when India’s Parliament will be taking a final view on them.

In the meantime, investors in Indian infrastructure must undertake to operate effectively within the existing framework – but without creating externalities that will damage or even devastate livelihoods. Rajiv Lall, managing director and chief executive of IDFC, who was one of the speakers of the Infrastructure Investor launch event, says investors must actively experiment with alternatives to land acquisition such as land pooling and land readjustment schemes. If successful, such experimentation will make for better outcomes in infrastructure creation, and ultimately for better infrastructure politics.

Getting this right will often be difficult. But the search for viable solutions must be part of any project plan right from the beginning. Otherwise what is supposed to provide a benefit to the public can turn into a costly nightmare.