New Land Bill may delay, raise cost of Navi Mumbai airport

Only this week, the Maharashtra government prepared a request for qualification (RFQ) document for the construction of the project. 
Reuters

Even without becoming a law as yet, you can see the effect the proposed Land Acquisition and Rehabilitation Bill is having on infrastructure and transport projects: earlier this week, land owners (villagers) who collectively own more than 1,000 acres of land earmarked for the Navi Mumbai International Airport demanded a steep increase in their compensation to Rs 20 crore per acre – five times higher than the market rate.

The new bill requires land buyers to pay owners four times the market rate in rural areas and twice the market rate in urban areas. So clearly, the villagers jumped quickly to capitalise on that point. While the 1,000 acres represents just a quarter of the entire airport site, the additional Rs 20,000-crore burden (Rs 20 crore X 1,000 acres) that the villagers are demanding could make it even more difficult to get the much-delayed project off the ground. That’s not all: there’s also the higher cost of rehabilitating the villagers — 6,000 or so — staying on the land.

The original cost of the Navi Mumbai airport project, covering a total area of 2,020 hectares, was estimated at Rs 10,000 crore. There is now little chance that the costs will be anywhere near this estimate.

With the new bill tabled in Parliament this week, one thing’s for sure: the debate over compensation will start all over again and put off at least some likely bidders for the airport project. It might even delay the project again, since financial viability will have to be calculated once again. On Friday, one media report said a land-for-land deal was also under consideration. “There is no harm if the state offers us developed land of the same area around the airport. We then won’t even ask for money,” said RC Gharat, a negotiator for the villagers.

On the surface, it seems like a nice idea, but getting land for cash is difficult enough; a land-for-land exchange will be fraught with even more problems. Getting land from one side has already delayed things long enough; now, offering suitable and adequate land in exchange will only prolong the process.

Only this week, the Maharashtra government prepared a request for qualification (RFQ) document for the construction of the project, indicating its willingness to finally start the bidding process. According to one media report, the government wants companies with a net worth of more than $369 million as well as previous experience in large transport infrastructure projects anywhere in the world.

Navi Mumbai airport is supposed to become the second international airport in Mumbai after the Chhatrapati Shivaji International Airport, which is rapidly reaching its saturation level. Once operational, it is expected to handle up to 40 million passengers a year. But progress on the Navi Mumbai project, the first phase of which is supposed to become operational by 2014, now seems tougher than ever. Meanwhile, land development plans for the airport project, scheduled for June 2012, is inching closer.

The need to have another airport was vividly highlighted earlier this week when the main runway of the existing airport — the country’s busiest — was shut for a couple of days after a Turkish aircraft veered off the runway and got stuck in slushy mud. Airport operations were severely hampered for nearly 40 hours, disrupting flights and leaving several passengers stranded.

It all points to one thing: we desperately need to upgrade our infrastructure — and we should be creating laws that promote that goal. Instead, we might now possibly get a law that will further delay transport and infrastructure projects, which, in any case, don’t have a track record of being completed on time. The new Land Acquisition Bill, as Firstpost has argued, will not only cripple growth but also restrain job creation.

Bill to affect realty, metals, mining and infrastructure companies

A report by Religare Capital also pointed out that “the Bill, prima facie, is expected to increase the cost of land acquisition for the railways, National Highways Authority of India (NHAI), mining, airport and metal projects, even as it is expected to speed up land acquisition due to better compensation and lesser disputes.”

The report named Tata Steel, JSW, Jindal Steel & Power and Sterlite Energy as likely candidates to witness cost over-runs on various projects due to higher acquisition prices. Some of the projects being undertaken by JSW in Bengal and Jharkhand may see cost over-runs, the brokerage said.

An upward revision in project costs is also likely to be seen at Jindal Steel and Power’s Jharkhand project, Tata Steel’s Odisha project and Sterlite Energy’s Jharsuguda project, where land acquisition is still going on, Religare Capital added. However, a large part of the land acquisition for these greenfield projects is complete, the report added.

Infrastructure companies have also expressed wariness about some of the clauses in the proposed bill. Parag Parikh, director and chief financial officer of Gammon Infrastructure, told CNBC recently that while he didn’t consider the cost of land acquisition a major challenge( because it was typically factored into estimates), the challenge was getting the consent of 80 percent of land owners, which, he noted, could “become quite a lengthy process”.

Another clause directing land buyers to hand back to the original land owner if the land is not utilised for the stated objective within five years could also pose a problem. “I think that is where we need to take a cautious approach because as an infrastructure sector, things can get delayed,” Parikh added.

The Religare report noted that in the case of the railways, there could be delays and an increase in the cost of projects like dedicated freight corridors. The higher cost of land would also have a negative impact on the ports sector, it said. In the case of mining companies, the government allots them mining concessions/blocks and then the land is either leased out by the government or the mining companies need to acquire it, which may mean a higher cost of land acquisition.

Of course, we all know that the real estate industry has already slammed the bill, arguing that it will raise their project costs by up to 5o percent. While there is broad-based agreement that the bill is bad news for the sector, some analysts have pointed out some differences in the impact of the bill on companies.

“We believe real estate companies which already have significant land banks (sufficient for the next 10-20 years of development) are likely to gain as compared to developers with smaller land banks (as they would have to acquire land bank at higher cost which could affect their profitability),” said RBS in an impact note on the bill.

However, even developers with large land banks might end up paying a higher price if they need to buy some additional plots of land to make their land parcels contiguous. “Considering the current market conditions where sales have slowed down, we believe the developers would not be able to completely pass on the impact of higher land cost to the customers,” it added. The brokerage also picked DLF as its top pick for having a good chunk of its land bank in metros/Tier 1 cities, which was acquired at a very low cost.

Nomura Securities had an interesting point to make: it thought the impact of the bill would be minimal in the near term because most companies are not looking at buying large tracts of land, especially in the outskirts of cities and rural areas. Indeed, companies that hold land are likely to benefit, analyst Aatash Shah told CNBC. “Companies like DLF, Unitech, HDIL, all of which are planning to sell land, are likely to benefit in terms of their land values. However, Oberoi Realty could have a negative impact because the company is looking to buy land,” he added.

However, if the bill has retrospective effect, as it seems to indicate, even developers who have already bought property might end up having to pay more for the land they bought in the past. Ambit Capital notes that the bill will “impact developers retrospectively only if their land bank includes a larg land parcel (more than 50-100 acres in size) which was previously used for agricultural purposes, is intended to be used for ‘public purpose’, was acquired from farmers through the government and is currently under dispute around ownership with the farmers.”The brokerage says it will seek more clarifications from developers on this point.

It just adds to the troubled outlook for the real estate sector, which is already reeling under high debt loads, slowing demand and dwindling access to funds.

In sum, the impact of the bill on industry is this: delays, delays and more delays. Business as usual then?

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