Outsourcing encumbrances

One of the biggest challenges with projects involving commercial development of government lands in India is that of resolving encumbrances associated with it. These encumbrances which include encroachments, lack of clear records, and multiple claims, result in litigation and numerous socio-political problems. All conventional approaches in resolving the resultant dead-locks have failed, thereby locking up large quantities of such lands. Here is a "second-best" approach to settling them - outsource it!

There are a large extents prime real estate with such encumbrances in all our cities, especially in the form of unauthorised slums, under sub-optimal utilization. Freeing them up would not only generate valuable revenue, but also substantially increase the stock of land available, thereby putting downward pressure on urban land and rental values. This would help in making urban housing more affordable and contribute towards urban growth.

The majority of these encroachments are very old and embroiled in some form of litigation. Evicting such encroachments would involve dispossessing large numbers of families and are therefore politically sensitive. Government agencies have tried to address this problem by negotiating with the encroachers, so as to resettle them and redevelop the lands. The resettlement proposal may be on the same land, elsewhere in government residential colonies, or sharing the newly built up area.

So here is a possible solution. Development of the land on a Public Private Partnership (PPP) mode, with the private agency being allocated (bidded out) the risk of negotiating the resettlement. The rehabilitation agreement can be anything - reettling them elsewhere or in a part of the same land, or payment of cash compensation, or allotment of a share of the developed commercial space, or another mutually agreeable arrangement.

The private developer will discount for the cost of resettlement and make his bid. A process of open competitive bidding process will help in price discovery in a transparent manner. It is true that in the inital stages, the bidders are likely to be conservative in their quotes. But once the market gets established and few successful examples come on board, more accurate approximations will emerge.

An Econ 101 detour here. Coase Theorem, developed by Nobel laureate Ronald Coase, argues that in the absence of transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. It defines two pre-conditions for the arrival of an efficient outcome through bargaining - clearly defined property rights and obstacle free bargaining process. In practice though, both these conditions are difficult to achieve.

I will argue that the transaction costs are much higher and the two pre-requisites almost impossible (government cannot recognize the title right of the encroacher and obstacles to bargaining are varied and numerous) to achieve when government becomes a party to the negotiating process. However, it is possible to minimize transaction costs and have the requisite preconditions when the negotiations are held between two private agencies.

Government agencies, circumscribed as they are by limitations imposed by the framework of rules and regulations, do not have the flexibility required to negotiate and solve such problems. Further, negotiations with government most often gets politicized, resulting in brinkmanship and unreasonable demands. Rent seeking agencies enter the negotiations on behalf of the settlers, and transaction costs increase. Thanks to these external agents and the sharing of benefits with them, both the settlers and government get a sub-optimal deal. We therefore have an economically inefficient solution.

Private agencies, free from such constraints, are much better suited to arriving at a mutually agreeable, negotiated settlements. Further, private agencies have the flexibility and informal sources of power to manage the political and social fallout from such resettlements. The transaction costs can be minimized and the settlers can get a larger share of the benefits. In other words, government can outsource the settlement of difficult encumbrances.

Theoretically atleast, such mechanism should work, provided a framework for a Coasean bargain can be laid out. In most cases, thanks to the steep rise in land values in cities, the inherent value of these lands (for the developers) are many times higher than the value to the settlers. The value to the settlers come not so much from the value of their encroachments per se, but from the convenience (close to their places of work) associated with the location of such settlements. There are clear values that can possibly be attached to both.

I agree that there are many dangers associated with such solutions. Foremost, there is a strong possibility of the successful bidder using strong arm tactics to dispossess the encroachers or force a grossly unfair settlement on them. It is therefore important to build in appropriate provisions to protect the interests of those being displaced, especially those genuinely poor, and assure them a pre-defined basic minimum of rights. One way of reassuring the settlers is to incorporate an agreement between the settlers and the successful bidder, as an annexure to the agreement between the government and the bidder. However, the government should not be a party to the bilateral deal between the two private parties.

Atleast for the initial few projects, such arrangements are ideal for the projects on smaller extents of lands. Given the history of such disputes, it is useful to have an arrangement that has a better chance of success than the conventional route, whose history does not inspire any confidence.