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On March 10, Lok Sabha passed a Bill to amend the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013. The Bill is now pending in Rajya Sabha. This blog briefly outlines the context and the major legislative changes to the land acquisition law. I. Context Land acquisition, unlike the purchase of land, is the forcible take-over of privately owned land by the government. Land is acquired for projects which serve a ‘public purpose’. These include government projects, public-private partnership projects, and private projects. Currently, what qualifies as ‘public purpose’ has been defined to include defence projects, infrastructure projects, and projects related to housing for the poor, among others. Till 2014, the Land Acquisition Act, 1894 regulated the process of land acquisition. While the 1894 Act provided compensation to land owners, it did not provide for rehabilitation and resettlement (R&R) to displaced families. These were some of the reasons provided by the government to justify the need for a new legislation to regulate the process of land acquisition. Additionally, the Supreme Court had also pointed out issues with determination of fair compensation, and what constitutes public purpose, etc., in the 1894 Act. To this end, the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 was passed by Parliament, in 2013. II. Current legislative framework for land acquisition The 2013 Act brought in several changes to the process of land acquisition in the country. Firstly, it increased the compensation provided to land owners, from 1.3 times the price of land to 2 times the price of land in urban areas, and 2-4 times the price of land in rural areas. Secondly, unlike the earlier Act which did not provide rehabilitation and resettlement, the 2013 Act provided R&R to land owners as well as those families which did not own land, but were dependent on the land for their livelihood. The Act permits states to provide higher compensation and R&R. Thirdly, unlike the previous Act, it mandated that a Social Impact Assessment be conducted for all projects, except those for which land was required urgently. An SIA assesses certain aspects of the acquisition such as whether the project serves a public purpose, whether the minimum area that is required is being acquired, and the social impact of the acquisition. Fourthly, it also mandated that the consent of 80% of land owners be obtained for private projects, and the consent of 70% of land owners be obtained for public-private partnership projects. However, consent of land owners is not required for government projects. The 2013 Act also made certain other changes to the process of land acquisition, including prohibiting the acquisition of irrigated multi-cropped land, except in certain cases where the limit may be specified by the government. III. Promulgation of an Ordinance to amend the 2013 Act In addition to the 2013 Act, there are certain other laws which govern land acquisition in particular sectors, such as the National Highways Act, 1956 and the Railways Act, 1989. The 2013 Act required that the compensation and R&R provisions of 13 such laws be brought in consonance with it, within a year of its enactment, (that is, by January 1, 2015) through a notification. Since this was not done by the required date, the government issued an Ordinance (as Parliament was not in session) to extend the compensation and R&R provisions of the 2013 Act to these 13 laws. However, the Ordinance also made other changes to the 2013 Act. The Ordinance was promulgated on December 31, 2014 and will lapse on April 5, 2015 if not passed as a law by Parliament. Thus, the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Amendment) Bill, 2015 has been introduced in Parliament to replace the Ordinance. The Bill has been passed by Lok Sabha, with certain changes, and is pending in Rajya Sabha. The next section outlines the major changes the Bill (as passed by Lok Sabha) proposes to make to 2013 Act. IV. Changes proposed by the 2015 Bill to the 2013 Act Some of the major changes proposed by the 2015 Bill (as passed by Lok Sabha) relate to provisions such as obtaining the consent of land owners; conducting an SIA; return of unutilised land; inclusion of private entities; and commission of offences by the government. Certain exemptions for five categories of projects: As mentioned above, the 2013 Act requires that the consent of 80% of land owners is obtained when land is acquired for private projects, and the consent of 70% of land owners is obtained when land is acquired for public-private partnership projects. The Bill exempts five categories of projects from this provision of the 2013 Act. These five categories are: (i) defence, (ii) rural infrastructure, (iii) affordable housing, (iv) industrial corridors (set up by the government/government undertakings, up to 1 km on either side of the road/railway), and (v) infrastructure projects. The Bill also allows the government to exempt these five categories of projects from: (i) the requirement of a Social Impact Assessment, and (ii) the limits that apply for acquisition of irrigated multi-cropped land, through issuing a notification. Before issuing this notification, the government must ensure that the extent of land being acquired is in keeping with the minimum land required for such a project. The government has stated that these exemptions are being made in order to expedite the process of land acquisition in these specific areas. However, the opponents of the Bill have pointed out that these five exempted categories could cover a majority of projects for which land can be acquired, and consent and SIA will not apply for these projects. Return of unutilised land: Secondly, the Bill changes the time period after which unutilised, acquired land must be returned. The 2013 Act states that if land acquired under it remains unutilised for five years, it must be returned to the original owners or the land bank. The Bill changes this to state that the period after which unutilised land will need to be returned will be the later of: (i) five years, or (ii) any period specified at the time of setting up the project. Acquisition of land for private entities: Under the 2013 Act, as mentioned above, land can be acquired for the government, a public-private partnership, or a private company, if the acquisition serves a public purpose. The third major change the Bill seeks to make is that it changes the term ‘private company’ to ‘private entity’. This implies that land may now be acquired for a proprietorship, partnership, corporation, non-profit organisation, or other entity, in addition to a private company, if the project serves a public purpose. Offences by the government: Fourthly, under the 2013 Act, if an offence is committed by a government department, the head of the department will be held guilty unless he can show that he had exercised due diligence to prevent the commission of the offence. The Bill removes this section. It adds a provision to state that if an offence is committed by a government employee, he can be prosecuted only with the prior sanction of the government. Acquisition of land for private hospitals and educational institutions: While the 2013 Act excluded acquisition of land for private hospitals and private educational institutions, the Bill sought to include these two within its scope. However, the Lok Sabha removed this provision of the Bill. Thus, in its present form, the Bill does not include the acquisition of land for private hospitals and private educational institutions. Other changes proposed in Lok Sabha: In addition to removing social infrastructure from one of the five exempted categories of projects, clarifying the definition of industrial corridors, and removing the provision related to acquisition for private hospitals and private educational institutions, the Lok Sabha made a few other changes to the Bill, prior to passing it. These include: (i) employment must be provided to ‘one member of an affected family of farm labour’ as a part of the R&R award, in addition to the current provision which specifies that one member of an affected family must be provided employment as a part of R&R; (ii) hearings of the Land Acquisition, Rehabilitation and Resettlement Authority to address grievances related to compensation be held in the district where land is being acquired; and (iii) a survey of wasteland must be conducted and records of these land must be maintained. For more details on the 2015 Bill, see the PRS Bill page, here. A version of this blog appeared on rediff.com on February 27, 2015.
India’s urban population has grown by 32% from 2001 to 2011 as compared to 18% growth in total population of the country.[1] As per Census 2011, 31% of the country’s population (377 million people) live in cities, and contribute to 63% of the country’s GDP.[2] The urban population is projected to grow up to 600 million by 2031.2 With increasing urban population, the need for providing better infrastructure and services in cities is increasing.[3] The government has introduced several schemes to address different urban issues. These include the Atal Mission for Rejuvenation and Urban Transformation (AMRUT), Smart Cities Mission, Heritage City Development and Augmentation Yojana (HRIDAY), Pradhan Mantri Awas Yojana – Housing for All (Urban) (PMAY-U), and Swachh Bharat Mission (Urban).
Last week the Ministry of Urban Development released the next batch of winners under the Smart Cities Mission.[4] This takes the number of smart cities to 90. The government has also announced a few policies and released data indicators to help with the implementation of the urban schemes. In light of all this, we discuss how the new schemes are changing the mandate of urban development, the fiscal challenge of implementing such schemes, and the policies that are trying to address some of these challenges.
Urbanisation in India
The Jawaharlal Nehru National Urban Renewal Mission (JnNURM), launched in 2005, was one of the first urban development schemes implemented by the central government. Under JnNURM, the central government specified certain mandatory and optional reforms for cities, and provided assistance to the state governments and cities that were linked to the implementation of these reforms. JnNURM focused on improving urban infrastructure and service delivery, community participation, and accountability of city governments towards citizens.
In comparison, the new urban schemes move beyond the mandate that was set by JnNURM. While AMRUT captures most of the objectives under JnNURM, the other schemes seek to address issues around sanitation (through Swachh Bharat), affordable housing (through PMAY-U), and technology innovation (through Smart Cities). Further, the new schemes seek to decentralize the planning process to the city and state level, by giving them more decision making powers.2 So, while earlier, majority of the funding came from the central and state governments, now, a significant share of the funding needs to be raised by the cities themselves.
For example, under the Smart Cities Mission, the total cost of projects proposed by the 60 smart cities (winners from the earlier rounds) is Rs 1.3 lakh crore.[5] About 42% of this amount will come from central and state funding towards the Mission, and the rest will be raised by the cities.[6]
The new schemes suggest that cities may raise these funds through: (i) their own resources such as collection of user fees, land monetization, property taxes, etc., (ii) finance mechanisms such as municipal bonds, (iii) leveraging borrowings from financial institutions, and (iv) the private sector through Public Private Partnerships (PPPs).[7]
In 2011, an Expert Committee on Indian Urban Infrastructure and Services (HPEC) had projected that creation of the required urban infrastructure would translate into an investment of Rs 97,500 crore to Rs 1,95,000 crore annually.[8] The current urban schemes are investing around Rs 32,500 crore annually.
Financial capacity of cities
Currently, the different sources of revenue that municipal corporations have access to include: (i) tax revenue (property tax, tax on electricity, toll tax, entertainment tax), (ii) non-tax revenue (user charges, building permission fees, sale and hire charges), (iii) grants-in-aid (from state and central governments), and (iv) debt (loans borrowed from financial institutions and banks, and municipal bonds).
While cities are now required to raise more financing for urban projects, they do not have the required fiscal and technical capacity.8,[9] The HPEC had observed that cities in India are among the weakest in the world, both in terms of capacity to raise resources and financial autonomy. Even though cities have been getting higher allocations from the centre and states, their own tax bases are narrow.8 Further, several taxes that cities can levy are still mandated by the state government. Because of their poor governance and financial situation, cities also find it difficult to access external financing.8,7
In order to help cities improve their finances, the government has introduced a few policies, and released a few indicators. Some of these are discussed below:
Policy proposals and data indicators
Value Capture Financing (VCF): The VCF policy framework was introduced by the Ministry of Urban Development in February 2017.[10] VCF is a principle that states that people benefiting from public investments in infrastructure should pay for it. Currently when governments invest in roads, airports and industries in an area, private property owners in that area benefit from it. However, governments recover only a limited value from such investments, constraining their ability to make further public investments elsewhere. VCF helps in capturing a part of the increment in the value of land due to such investments, and use it to fund new infrastructure projects.
The different instruments of VCF include: land value tax, fee for changing land use, betterment levy, development charges, transfer of development rights, and land pooling systems.10 For example, Karnataka uses certain value capture methods to fund its mass transit projects. The Mumbai Metropolitan Region Development Authority (MMRDA), and City and Industrial Development Corporation Limited (CIDCO) have used betterment levy (tax levied on land that has gained in value because of public infrastructure investments) to finance infrastructure projects.
Municipal bonds: Municipal bonds are bonds issued by urban local bodies (municipal corporations or entities owned by municipal bodies) to raise money for financing specific projects such as infrastructure projects. The Securities and Exchange Board of India regulations (2015) regarding municipal bonds provide that, to issue such bonds, municipalities must: (i) not have negative net worth in any of the three preceding financial years, and (ii) not have defaulted in any loan repayments in the last one year.[11] Therefore, a city’s performance in the bond market depends on its fiscal performance. One of the ways to determine a city’s financial health is through credit ratings.
Credit rating of cities: In September 2016, the Ministry of Urban Development started assigning cities with credit ratings.[12] These credit ratings were assigned based on assets and liabilities of the cities, revenue streams, resources available for capital investments, accounting practices, and other governance practices.
Of the total 20 ratings ranging from AAA to D, BBB– is the ‘Investment Grade’ rating and cities rated below BBB– need to undertake necessary interventions to improve their ratings for obtaining positive response to the Municipal Bonds to be issued. By March 2017, 94 cities were assigned credit ratings, 55 of which got ‘investment grade’ ratings.[13]
Credit ratings indicate what projects might be more lucrative for investments. This, in turn, helps investors decide where to invest and determine the terms of such investments (based on the expected returns).
Earlier this month, the Pune Municipal Corporation raised Rs 200 crore through the sale of municipal bonds, to finance water supply projects under the Smart Cities Mission.[14] The city had received an AA+ credit rating (second highest rating) in the recent credit rankings assigned by the central government.
Other than credit ratings, the Ministry of Urban Development has also come up with other data indicators around cities such as the Swachh Bharat rankings, and the City Liveability Index (measuring mobility, access to healthcare and education, employment opportunities, etc). These rankings seek to foster a sense of competition across cities, and also help them map their performances year on year.
Some financing mechanisms, such as municipal bonds, have been around in India for the last two decades, but cities haven’t been able to make much use of them. It remains to be seen whether the introduction of indicators such as credit ratings helps the municipal bond market take off. While these mechanisms may improve the finances of cities, the question is would more funding solve the cities’ problems. Or would it require municipal government to take a different approach to problem solving.
[1] Census of India, 2011.
[2] Mission Statement and Guidelines, Smart Cities, Ministry of Urban Development, June 2015, http://smartcities.gov.in/writereaddata/SmartCityGuidelines.pdf.
[3] Report on Indian Urban Infrastructure and Services, March, 2011, The High Powered Expert Committee for estimating the investment requirements for urban infrastructure services, http://icrier.org/pdf/FinalReport-hpec.pdf.
[4] “30 more smart cities announced; takes the total to 90 so far”, Press Information Bureau, Ministry of Urban Development, June 23, 2017.
[5] Smart Cities Mission, Ministry of Urban Development, last accessed on June 30, 2017, http://smartcities.gov.in/content/.
[6] Smart City Plans, Last accessed in June 2017.
[7] “Financing of Smart Cities”, Smart Cities Mission, Ministry of Urban Development, http://smartcities.gov.in/upload/uploadfiles/files/Financing%20of%20Smart%20Cities.pdf.
[8] “Report on Indian Urban Infrastructure and Services”, March, 2011, The High Powered Expert Committee for estimating the investment requirements for urban infrastructure services, http://icrier.org/pdf/FinalReport-hpec.pdf.
[9] Fourteenth Finance Commission, Ministry of Finance, February 2015, http://finmin.nic.in/14fincomm/14fcrengVol1.pdf.
[10] Value Capture Finance Policy Framework, Ministry of Urban Development, February 2017, http://smartcities.gov.in/upload/5901982d9e461VCFPolicyFrameworkFINAL.pdf.
[11] Securities and Exchange Board of India (Issue and Listing of Debt Securities by Municipalities) Regulations, 2015, Securities and Exchange Board of India, July 15, 2015, http://www.sebi.gov.in/sebi_data/attachdocs/1436964571729.pdf.
[12] “Credit rating of cities under urban reforms begins”, Press Information Bureau, Ministry of Urban Development, September 6, 2016.
[13] “Credit Rating of Urban Local Bodies gain Momentum”, Press Information Bureau, Ministry of Urban Development, March 26, 2017.
[14] “Pune civic body raises Rs200 crore via municipal bonds”, LiveMint, June 19, 2017, http://www.livemint.com/Money/JOOzaSTKnC6k1EZGeFh8LJ/Pune-civic-body-raises-Rs200-crore-via-municipal-bonds.html.
