The Economic Times;  July 19, 2010

Land pooling and reconstitution

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LPR enables land owners to share in the land value gains that accrue with land-use change and infrastructure provision, thereby overcoming their resistance to giving up land.

Unless action is taken urgently, we should be prepared for the horrifying reality that close to three-quarters of the population in urban India will either live in slums or in colonies with substandard infrastructure - such as roads, water and sewer - and public facilities - such as schools, hospitals, parks and community centres.

Major reasons for the scarcity of well-serviced land are land acquisition difficulties and financial constraints of urban local bodies (ULBs).

Land pooling and reconstitution (LPR) offers a way out of this grim situation. Indeed, it solves several crucial problems. It enables land owners to share in the land value gains that accrue with land-use change and infrastructure provision, thereby overcoming their resistance to giving up land.

This facilitates increased supply of land for urban use. Equally important, the LPR scheme can fully finance the development of infrastructure without recourse to general tax revenues of the ULB. And it allows planned urbanisation against ad-hoc urban sprawl.

How does this happen in practice? In effect, a residential colony is developed by the government by pooling together a number of individual land-owners' contiguous land plots. A portion of land is taken from each plot for provision of infrastructure and public facilities.

A part of the land may also be reserved for sale by the development authority for commercial or residential use. The rest of the land is returned to the original land owners.

For example, in Gujarat, the landholders get back at least 60% of their original landholding (up to 40% may be kept by the development authority - of which around 15% is for roads, 10% for other infrastructure and public facilities, and another 15% is reserved for sale). Additionally, the land owners pay betterment charges that partially fund infrastructure development.

LPR offers huge benefits. First, it is fairer to the original land owner who does not lose all his land as may be the case under compulsory land acquisition. By being able to retain a part of his land, he also stands to gain from the appreciation in land value post-provision of infrastructure.

He has the flexibility of deciding if and when to sell his land and realise the full market value at the time of sale. In fast-growing towns and cities, the gain in land value on even part of the land (say, 60% of the original plot) far exceeds the betterment charges paid by land owners.

Second, the LPR scheme can finance the development of infrastructure - including the capital-intensive trunk infrastructure - through betterment charges supplemented by the sale of reserved commercial and residential plots. Moreover, it does not require large cash outlays for land acquisition that would be onerous for a typically cash-strapped ULB.

The ULB only needs to pay for the 40% of land net of betterment charges that it levies on the landowners, resulting in negligible cash outflows.

Variants of LPR have been used internationally for urban development including in Europe, Asia and Australia. It played a leading role in the urbanisation of Seoul and Tokyo, and is popular in smaller South Korean towns and across several countries such as Germany, Holland, Nepal and Australia.

In India, under the Bombay Town Planning Act of 1915, Town Planning Schemes (TPS) were based on LPR in the erstwhile Bombay Presidency. Later, this Act became the basis for the TPS-enabling Act in Gujarat: the Gujarat Town Planning and Urban Development Act (GTPUDA), 1976.

TPS was widely used in Maharashtra in the first half of the 20th century. For example, large parts of Mahim, Khar and Borivali in Mumbai were developed through TPS. However, its use declined when Maharashtra shifted the focus for urban development from TPS to detailed development plans (DPs).

Among the reasons for the shift was the long time taken between TPS initiation and final government approval due to the extensive public consultation process (often more than a decade).

And scheme implementation could only begin after final approval. Moreover, an ownership dispute over a single land parcel could hold up the entire scheme. Unfortunately though, in practice, DPs were rarely prepared, while the use of TPS declined.

On the other hand, TPS found a favourable environment in Gujarat and has become the predominant means of urban expansion in all its major cities. With a few clever changes to the TPS mechanism, Gujarat was able to address the problems associated with Maharashtra's TP schemes.

First, the construction of roads and other basic infrastructure is permitted as soon as the draft TPS is approved in Gujarat rather than having to wait for the final scheme approval.

As a result, infrastructure development can begin as early as 18 months from scheme initiation against a 10-15 year wait. Since land values rise with the provision of infrastructure, this change has helped gain land-owner support. Second, the TPS process does not settle land ownership disputes.

It just transfers them to the newly-reconstituted plot, thereby not holding up the TPS approval process. Finally, the sale of reserved plots helps finance scheme-level and regional infrastructure and services.

LPR holds immense potential nationally. All we need is the political will. Amendments to State Town Planning Acts may be required, especially if these do not currently allow plot reconstitution and levy of betterment charges. In other cases, existing provisions within the state and local planning acts can be explored to frame rules for LPR.

The use of LPR can also be incentivised through the JNNURM-led reform agenda. Leveraging land in this manner can meet a large part of the estimated $30 billion a year needed for financing India's urban infrastructure - and all of this in an inclusive, equitable and well-planned way.