By Yogesh Singh, Pia Singh & Aditya Alok
Several airports across the world that are owned by state and national government authorities are increasingly being operated and managed by private developers under various public private partnership models and the Indian story is no different. Over the last decade, the civil aviation sector in India has grown exponentially and is currently positioned as the ninth largest market globally with an expected growth that is likely to place it within the top five aviation markets in the world by the year 2020.
This article provides a broad overview of the legislative and institutional framework governing acquisition of land for infrastructure projects and airports in particular. We have primarily focused on instances of the government acquiring private land for infrastructure projects, as this has been the general trend in India. Having said that, if a project developer was to purchase private land for the project they could face a number of issues such as ownership, title, number of sellers for the land, land owners demand for higher prices due to proposed project activity and cost implications of resettlement and rehabilitation of project affected families.
Until recently, the Airports Authority of India (AAI) had exclusively been responsible for developing, operating and managing airports in India. In 2004, the central government began an airport privatization and modernization drive. The privatization drive was probably motivated by severe constraints in capacity and the magnitude of investments required for this modernization. Growing interest from private operators led to the greenfield development of five airports in India i.e. Delhi, Mumbai, Bangalore, Hyderabad, Chennai and Cochin through the public private partnership model. By 2017, the Ministry of Civil Aviation has targeted the development of 17 new airports at various locations.
The development of an airport generally involves complex interplay between various government agencies and authorities. Some of the key players include the Ministry of Civil Aviation, which is responsible for the formulation and development of policies and the administration of the Aircraft Act, 1934, Aircraft Rules, 1937 and other legislations relating to the aviation sector; the Directorate General of Civil Aviation who is responsible for safety, the Bureau of Civil Aviation Security, responsible for security and the Airport Economic Regulatory Authority to safeguard the interest of users and service providers at airports and set tariff for provision of aeronautical services.
Readers should note that a new land legislation (The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Bill, 2013) has recently been deliberated and passed by the Indian Parliament. This legislation, which will provide the framework for land acquisition and compensation, is yet to be notified and detailed land rules will be formulated by the Indian government to supplement it. We have prepared this article and discussed some key changes introduced in this legislation during its Parliamentary passage which may be subject to change. When enacted, the new legislation should considerably ease up the land acquisition process in India.
Legal and Regulatory Framework for Acquiring Land
In India, broadly speaking, there are four categories of land (a) forest land; (b) government revenue land; (c) agricultural land; and (d) private land. It is the inherent right of every sovereign nation to acquire property from its citizens for public use. This right, also known as “eminent domain” is contained in the Indian Constitution which provides the extent within which such power should be exercised. Firstly, acquisition of private property should be for public purposes only and secondly that, no property can be acquired without the payment of compensation to the seller, under the applicable laws.
The Land Acquisition Act, 1894 (LA Act) is the umbrella legislation detailing the procedure for involuntary acquisition of land from private land owners by the central government and/or any state government. Under the LA Act, the definition of ‘public purpose’ is very broad and set out in inclusive terms. Public purpose includes provision of village sites, planned development or improvement of existing village sites, provision of land for town and rural planning, provision of land for residential purpose to the poor or landless, educational and housing schemes, the provision of land for planned development of land from public funds in pursuance of any scheme or policy of the central government or state government etc.
The LA Act Procedure: The Central or State Government (as the case may be) issues a notification in an official publication and two local newspapers stating it’s need to acquire a particular tract of land for a ‘public purpose’. Consequently, any person interested in the notified land has a right and is given an opportunity to object to such acquisitions in the presence of the relevant government official (in this case the Collector). This objection must be given in writing, within 30 days from the date of the notification. Post hearing of any and all objections and after making further enquiries, the Collector submits a report to the State Government stating the objections he or she has received, the record of the proceedings held and its recommendations. If after considering the Collector’s report, the government is satisfied that the specific tract of land needs to be acquired for a ‘public purpose’, it will make a declaration in the official publication and two local newspapers. Such declaration are made only after the government is completely satisfied that the compensation for the acquisition will be wholly or partly out of public revenues or some fund controlled or managed by the relevant local authority. Finally, award letters are issued by the land acquisition officer (in this case the Collector) finalizing area, purpose, value and amount of compensation payable to each interested party.
It is noteworthy that a lack of adequate compensation under the LA Act is one of the key reasons for legal action against the government. Compensation payable to private landowners is determined by the Collector on a case to case basis. The Collector does so after holding a public consultation and determining market value of the land on the relevant date. Market value is not a defined term under the LA Act. In land acquisition proceedings, sale deeds from previous land transactions are used to benchmark the market value.
Apart from practical issues and delays faced by project developers due to compensation assessment, other hurdles that are faced under the LA Act include the requirement for prior permission from the relevant authorities before the land can be mortgaged. Additionally that there is no time limit specified within which the land has to be put to use for the purpose for which it has been acquired.
New Law Enacted – to be notified shortly
To address these and other issues, the Central Government has proposed a a new Land Acquisition legislation i.e. the Right to Fair Compensation, Resettlement, Rehabilitation and Transparency in Land Acquisition Bill, 2013 (the LA Bill). The Land Acquisition Bill, 2013 was deliberated and passed in the monsoon session of both the houses of Parliament and on receiving Presidential assent, will be enacted to repeal the LA Act.
Key Changes in the LA Bill:
(a)_ A new integrated legislation, dealing with fair compensation, land acquisition and rehabilitation and resettlement;
(b) Public purpose has been re-defined to include amongst others, specific activities such as acquisition of land for strategic purposes (i.e. national security and defense); for infrastructure projects including transport, energy, water and sanitation, communication and social and commercial infrastructure; and for project affected families. The acquisition of land for airports will fall in infrastructure/transport category.
(c) For land being acquired for public private partnerships (PPP) projects and for private companies, the consent of 70% and 80% respectively from project affected families is required.
(d) The requirement of resettlement and rehabilitation of project affected families has been extended to land acquired by private companies through negotiations.
(e) Social impact assessment studies has been made compulsory in all cases where the government intends to acquire land for public purposes;
(f) With a view to ensure equitable development for land owners, a lease model has been contemplated. However, at present, no lease mechanism has been provided for.
(g) Unless the land acquired has been rendered unusable, no change of purpose will be permitted.
(h) If any acquired land remains unutilized for a period of 5 years from the date of possession, it should be returned either to the original owners or the government.
(h) The LA Bill will apply to acquisition proceedings in some instances where the land acquisition process has not been completed under the LA Act.
(h) Several layers of checks and balances have been introduced at a municipal government level to ensure for local participation and transparency.
(i) As far possible, acquisitions in land owned by schedules castes and tribal areas should be avoided.
(j) In cases where a company or body corporate offers its shares to the owners of the lands as a part of the compensation, for acquisition of land then such shares cannot exceed 25% of the market value determined by the Collector.
In spite of the State governments in India being empowered to adjudicate on matters relating to land, the Central Government also has a role in the land acquisition process and this often leads to an overlap between the State and Central Government, often creating more layers in an already complicated land acquisition process.
Acquiring Land for Airports and Infrastructure Projects
The acquisition of land requires complex coordination between several stakeholders including the Central and State Governments, local authorities and land owners. Land requirements for infrastructure projects across sectors differ. Simply put, in larger infrastructure projects and these include airports, roads, ports, land procurement is generally the responsibility of the appropriate government.
The intention of the Government to lease land to the private airport operator is provisioned for in the Operation, Management and Development Agreement (OMDA) (executed by the AAI and the private airport operator) and this includes real estate development rights in and around airports. Additionally, the private airport operator is granted this ‘right to use’ under a long-term land lease deed, which also contains the right to sub-lease the project land. Airport property development is divided into aeronautical and non-aeronautical activities. Aeronautical activities include development focusing on terminals, hangars, maintenance and fuelling facilities. Generally, private airport developers outsource non-aeronautical activities include hotels, business parks, restaurants and shops to third parties better qualified to operate and manage such activities..
In a road concession, the Central Government (empowered under a separate legislation – The National Highways Authority of India Act, 1988) acquires land, if it is satisfied that the acquisition is solely for public purpose and that the land is required for building or operating the infrastructure asset. NHAI’s obligation and risk of acquiring the land is captured in the model concession agreement developed by the Planning Commission for national highways. The land acquisition process for a roads project is very similar to that followed under the LA Act.
The ports sector in India is divided into ‘major ports’ and ‘non-major ports.’ Major ports are declared as such by or under laws made by the Parliament of India and are governed by the Major Ports Trust Act, 1963. All other ports that are not major ports are covered by the ‘concurrent list’ in the Constitution of India, and both the Central Government and the State Governments can legislate on matters relating to such non-major ports. Land to develop major port projects is acquired by the Central Government, under the Major Ports Land Policy which encourages private participation by putting in place a procedure for allotment of land either by lease or license. Land for minor ports is acquired under the LA Act. The concessioning authority’s obligation to provide land has been set out in two model concession agreements, developed by the Planning Commission and developed by the Ministry of Shipping.
In some cases, arranging for land is the obligation of a private developer. For example for conventional power procurement in India which is increasingly being done through the competitive bidding route, procurement has been classified into two mechanisms i.e. Case I and Case II projects. Case I projects are those where a power distribution utility calls for bids from private developers to procure a specified quantum of power without specifying the location, technology or fuel of the source of supply. Case II projects are those where a power distribution utility invites bids for setting up projects on the basis of tariff, and also specifies the fuel and location of the project. In a Case I project, the onus of arranging land is that of the project developer whereas in a Case II project the government arranges for the project land.
In the renewable space in India which generally comprise of smaller projects, the obligation of arranging project land is almost entirely on the developer.
Challenges Faced In Land Acquisition
One of the key challenges in developing and financing infrastructure projects and airports in particular, have been uncertainties and delays associated with the land acquisition process in India.
While the AAI has the authority to evict any person illegally occupying airport premises, this authority has been of little value in the context of the Mumbai airport which has been massively plagued by illegal encroachments in the form of slums Given the proximity of the encroachments there is a risk to national security. Also such illegal encroachments have meant that non-aviation related developments have been stalled, which have then translated into lower revenues and profit for the concessionaire, a lesser annual fee (percentage of revenue) to the AAI and an ultimately higher cost being passed on to the users in the form of user development fees, as alternate means of raising revenue.
Infrastructure projects in India tend to get caught between the political agendas of the ruling parties and the opposition. Examples include protracted land acquisition processes experienced by the steel company POSCO in the state of Odisha. This project was inordinately delayed for 6 years and was then eventually abandoned. Another example was Tata Motors moving out of West Bengal because of issues with the land acquisition process, which included massive protests by displaced farmers. Illustrative of the fact that, not only foreign direct investment (FDI) funded projects but, even projects funded by Indian entities have faced real time land acquisition issues.
Forest Land Related Approvals
If there is a component of forest land that comprises a part of the project land, this can delay matters significantly. While administrative control of forest land in India lies with the relevant State Governments, the Ministry of Environment and Forests is that Central Government ministry empowered under the Forest Conservation Act, 1980 to grant final approval for diversion of forest land for non-forest purposes and this is a two stage process. In case the project developer starts construction on the non-forest land, the developer assumes the risk of the forest land user approvals not coming through. If the developer waits for the forest clearance to come through upfront, it can lead to project financing delays and delays under the project agreements.
Agricultural Land- FDI restrictions
It is important to point out that the FDI policy of the Central Government prohibits foreign investment in agricultural activities (barring few exceptions). This risk is not applicable to the government’s acquisition of land so should ideally not be relevant in the present context as we are discussing investment in infrastructure projects. However, some officials seem to have taken the view that the purchase of agricultural land (especially using foreign funds) would amount to investment in agricultural activities even if the land has been purchased for an infrastructure project and the intention is to use the land only after appropriate user change approvals have been obtained. We are of the view that this is an incorrect stand but till the time this issue is not clarified by the central government, it will continue to be a concern for various project land acquisitions. Till then, developers would be well advised to seek a clarification from local authorities before they acquire any such private land.
As mentioned above, assessment of compensation is estimated as the number one reason for complex and long standing disputes. It is hoped that with the enactment of the LA Bill this will be remedied as it is proposed that compensation to be paid to the landowners will not be less than four times the market rate in rural areas and up to two times the market rate in urban areas. However, a potential downside is that this could result in a significant increase in project costs.
The second most important cause is not following the due process under the statute. The LA Act contains provisions detailing steps that need to be followed for the actual process for land acquisition. Often when these steps have not been completed or are not entirely followed through, legal action is initiated by landowners under protest. In fact, for this reason alone, it is estimated that due to such delays the cost of land acquisition specifically for airport projects may go up to $1 billion by 2018.
Resettlement and Rehabilitation Issues
Acquiring large tracts of land for infrastructure projects has involved displacing several project affected families. Presently while the LA Act does not contain any provisions relating to rehabilitation and resettlement of displaced persons, the LA Bill has provisioned for the resettlement and rehabilitation of landowners. However, resettlement and rehabilitation is provided for land acquisitions made by private companies in excess of a certain threshold which would be specified by the appropriate government on a case by case basis and all acquisitions made by the Government. This effectively excludes owners with smaller pieces of land who will be displaced without any compensation.
India is one of the largest democracies in the world and while the land acquisition process can be time consuming and fraught with issues, the government doesn’t have the easiest task. The real issue is a lack of sensitivity towards the needs of all stakeholders and the government’s inability to comply with regulatory processes’.
The involvement of multiple authorities does not always lead to clear thinking and decisive action. Greater coordination between the government departments and/or regulators is essential. New metros will soon require bigger and better airport infrastructure including new terminals to avoid natural bottlenecks beyond which they cannot be expanded and these should be planned for now.
As government authorities, private stakeholders, international consortiums and banks commit funding to planning and development of new airports, the uncertainty (time and cost) attached to the land acquisition process must be curtailed if not eliminated. Unviable models for airport development will prove to be deterrents to future airport development – an economic opportunity India cannot afford to miss.
Developers especially non-resident investors should consider some of the following steps that may have an impact on the process of acquiring and/or transferring land in India (a) conducting a detailed due diligence of the proposed land covering nature of land, title, revenue records, physical verification, encumbrance and litigation checks; (b) examining if the compensation process adopted for the land acquisition is reasonable and has been duly complied with; and (c) commit funds to resettlement and rehabilitation of project affected persons. The latter will be crucial under the new land acquisition regime when it comes into effect.
Yogesh Singh is an equity partner with Trilegal- which is one of the leading full service law firms in India. Apart from significant experience in strategic M&A and joint ventures for European and U.S. clients, Yogesh has acted for both investors and target companies on private equity transactions as well as structuring and corporate aspects of a number of infrastructure projects. In addition, Yogesh regularly advises clients on general corporate issues, restructurings, FCPA compliance strategies and employment issues. He can be reached at email@example.com.
Pia Singh is a senior associate at the New Delhi office of Trilegal and is part of the Energy and Infrastructure practice group. She has experience in projects involving roads, railways, ports and airports on a Public Private Partnerships (PPP) basis. She can be reached at firstname.lastname@example.org
Aditya Alok is an associate at the New Delhi office of Trilegal and is part of the Corporate practice group. Aditya has been involved in private equity transactions as well as corporate aspects of infrastructure projects. He can be reached at email@example.com