Why Land Acquisition By The Government For Private Entities Should Not Be Done
As the eminent domain power gives enormous power to the state functionaries it is important that the rules governing the use of eminent domain power should be as insusceptible to misuse as possible. If the State can acquire any property for any purpose whatsoever and fix compensation at any level then various kinds of misuses and abuses of the eminent domain power will become possible, indeed likely. One way that it will open the floodgates of corruption can be illustrated by the following example. Suppose there is a property worth 1 million in the market. The state functionaries with a view to make illegitimate gains acquire the property using the eminent domain power and pay a compensation of one hundred thousand to the property owner. Thereafter the property is transferred at a price of two hundred thousand to a private entity. The private entity as a consequence of this transfer benefits to the tune of eight hundred thousand. These gains then can be shared with the state functionaries as bribes. This example makes it clear that, given that the government can acquire property for any purpose whatsoever, unless there is a provision that the compensation must not be less than the market price, not some administratively fixed rate like the circle rate (circle rates are in general much lower than market prices), there will always be opportunities for unscrupulous bureaucrats and politicians to make money by acquiring valuable properties at nominal compensations and then transferring these properties at throw-away prices to industrialists and others with whom they have made advance deals for sharing the gains.
Even if there is a provision that the compensation must not be less than the market price, it does not mean that there can be no misuse of the eminent domain power. The provision of compensation being at least as large as the market price only ensures that the corrupt state functionaries will not be able to benefit by first acquiring the property under the eminent domain and then transferring it to some private entity, assuming of course that transferring property at a price less than the amount for which it was acquired is prohibited. But it does not ensure that the eminent domain power cannot be used for harassing political opponents. If a person owning a plot of land is not contemplating selling it at the ruling price, it follows that his valuation of land must be at least as large as the ruling price. In the case of land and other immovable property often the subjective valuation of the owner exceeds the market price; and in many instances by wide margin for varied reasons including those pertaining to family and community ties, and way of life. In case the subjective valuation exceeds market price, if the property is taken over under the eminent domain and the owner is given compensation equal to the market price he is going to sustain loss equal to the amount by which the subjective valuation exceeds the market price. Therefore if the State is required to pay only the market price as compensation for taking over of private property then there will be potential for harassing opponents by taking over property whose subjective valuation exceeds market price. This possibility of misuse of the eminent domain power can be eliminated only if the compensation is at least as large as the subjective valuation.
Thus we see that when private property is acquired under the eminent domain there are two kinds of misuses which are possible. There is the possibility that the acquisition from one private entity and subsequent transfer to another private entity might be done at less than the market price for illicit gains; and there is the possibility of harassing political opponents by acquiring private property by paying compensation which is less than the subjective valuation. The first of these possibilities can be eliminated by having the provision that the compensation must be at least as large as the market price and second of these possibilities can be eliminated by having the provision that the compensation must be at least as large as the subjective valuation. It is clear that if property is acquired by the State through purchase in the market then neither of the two misuses can take place. Voluntary nature of market transaction also ensures that the property owner will receive in return for his property an amount at least as large as his subjective valuation.
In view of the above, the use of eminent domain does not seem to be desirable if the situation is such that a market transaction is possible. If market transaction is not possible, say because of holdout problem, and therefore the use of eminent domain power becomes necessary then ideally its use should be constrained by the provision that the quantum of compensation must not be less than the subjective valuation. The difficulty with subjective valuation is its intractability. If the quantum of the compensation is going to be linked with the subjective valuation then the owner will obviously have an incentive to exaggerate it. One can only infer an upper bound for the actual value of the subjective valuation from the figure revealed by the owner.
As it is not feasible to have a provision which links compensation to subjective valuation, the only practicable thing seems to be to link it with market price. One can either have a provision requiring compensation to be equal to market price or equal to some multiple of market price, multiple being greater than one. In either case, as seen above, the misuse of the eminent domain power for illegitimate gains by acquiring and disposing of property at less than market price will not be possible (assuming of course that the property is never given away by the State for a sum less than the amount at which it is acquired). However, as compensation equal to market price will often imply under-compensation, the possibility of misuse for political purposes will remain. In case of compensation being equal to a multiple of market price, with multiple greater than one, one can expect cases of under-compensation as well as over-compensation. Higher the multiple, lesser will be the cases of under-compensation and greater of over-compensation. The possibility of misuse will remain in cases of under-compensation. Thus, no matter which multiple of market price is chosen, the possibilities of misuse cannot be ruled out altogether, although higher the multiple the lesser will be the possibilities of political misuse.
When there is over-compensation, the possibilities of corruption reenter in a different way. As an illustration, consider a plot of land with market price of one hundred thousand and the subjective valuation equal to the market price. If this plot of land is acquired under the eminent domain at twice the market price then the owner will benefit by an amount equal to one hundred thousand. This benefit can be shared with the state functionaries involved in the decision. Consequently, whenever it is permissible to fix compensation at a level greater than market price, there will be possibilities for corruption. Two points in this connection, however, should be noted. First, from the perspective of possibilities of corruption through over-compensation the market fares no better than the eminent domain if the property is being purchased by the State for its own use or it is permissible to transfer property to a private entity at a price less than the purchase price. The `agreed upon' price can be set by the corrupt state functionaries and the landowner at a level higher than the subjective valuation and the excess of the agreed upon price over the subjective valuation can be divided between the landowner and the corrupt state functionaries. Secondly, unlike the case of acquisition of land and its disposal at rates less than the market price where the corruption possibilities for all practical purposes are unlimited, the possibilities of corruption where land is acquired at rates greater than the subjective valuation tend to be quite limited because of budgetary constraints.
If one wishes to minimize possibilities of misuse of the eminent domain power then from the considerations discussed above it is clear that the acquisition of land under the eminent domain should be done as sparingly as possible and only in cases where the transaction in question is not possible through the market; and furthermore the compensation must not be less than the market price.
There is another reason why the eminent domain power should be used as sparingly as possible. When land is acquired under the dominant power the costs fall on the landowner if he is under-compensated, as is usually the case. The benefits, on the other hand, accrue to some private individuals (generally super-rich) in case the acquisition is done on behalf of a private entity; and to a section of public in case the acquisition is done by the government for some public facility. Consequently, under-compensated acquisitions necessarily involve unfairness to those whose properties are acquired. Benefiting private entities at the expense of landowners seems to be particularly unfair.
One way to limit the use of eminent domain power is to constrain it by the requirement of public purpose. The public purpose requirement will however be of little use in limiting the use of eminent domain if the idea of public purpose is construed so broadly that almost any acquisition whatsoever can be termed as furthering some public purpose or the other. Take for instance economic prosperity. In the contemporary world economic prosperity is considered highly desirable by every country. In view of this one may decide to term any wealth-enhancing activity as serving a public purpose. As in general one can expect change of land-use from agricultural to industrial to be wealth-enhancing, taking of agricultural land under the eminent domain on behalf of industrialists can be characterized as serving a public purpose. It is clear that with this kind of interpretations of the public purpose requirement the eminent domain power becomes essentially unconstrained; and its large-scale resorting to can be expected to result in widespread misuse, involving both corruption and harassment of political opponents, as well as unfairness.
There are several different ways by which the public purpose requirement can be made more meaningful. One way is to specifically rule out those purposes which are far-removed from the general understanding of what is meant by the expression `public purpose'; and the purposes which are particularly susceptible of misuse.* Another is to use an expression different from `public purpose' which is not amenable to the kind of extensionality that `public purpose' seems to be capable of. One such expression is `public use'. In United States if the use of the property is such that is open to use by public at large, or at least by a large number of people, then the use is termed as `public use'. Use of land for roads, railway-tracks, airports etc. are examples of public use. In United States the concept of public use is generally considered to be narrower than that of public purpose. One rather important point to note in the context of public use is that invoking of it does not rule out acquisition on behalf of private entities. If land is taken over on behalf of a private entity for the purpose of a public utility like a power plant then the taking will be regarded for public use.
It will be argued in what follows that if properly interpreted the idea of public purpose is considerably narrower than it is generally thought to be the case; and that it is inextricably linked with the State. In the context of what does and what does not constitute public purpose the following point is very important: In the context of a democratic society one set of values with their legitimate domains is particularly important; namely, the set of values which are enshrined in the constitution of the country. Given a set of values, in general, it would be the case that there would be circumstances under which it would be possible to uphold these values in their proper domains; and there would be circumstances under which it would not be possible to uphold these values in their proper domains. The State being the custodian of the constitution as well as the protector of the society would be under an obligation to see to it that the domain of no value expands to such an extent that it becomes incompatible with the continued upholding of other values in their proper domains. If the undertaking of a certain action by the government results in wealth enhancement, and also in a situation where the survival of some of the losers may be at stake, then the State must either not undertake the action or alternatively must undertake the necessary remedial measures as no democratic constitution can countenance such an expansion of the domain of one value at the expense of the values so crucial for a democratic polity. A right as important to a democratic polity as the right to life and liberty for instance cannot be given go-by merely by invoking some beneficial consequence like wealth-enhancement of the action leading to a violation of the right. In a democratic polity it is taken for granted that the governmental actions will either be in conformity with the constitutional values or in case of any incompatibility the corrective steps will follow.
In contradistinction with the State, a private entity has no duty to conduct itself in a manner so that its actions are in conformity with the constitutional values as long as they are legal. If a private entity is engaged in an activity with a profit motive or some other motive, under some circumstances, success of the private entity in its activity would be such that it could be said to be serving a public purpose. But, this fact in itself does not make the activity a public purpose activity. The private entity is solely concerned with its own objectives. If its activities have a beneficial impact on the society, well and good. But even if the unintended consequences of its activities are of a negative character, as long as these unintended consequences do not make the undertaking of the activity illegal, the private entity could not care less. A private entity, unlike the State, is under no obligation to protect all constitutional values in their respective domains. If the State can use its eminent domain power for a public purpose only then it is clear that the project making use of the acquired land must either be in the public sector or alternatively regulated appropriately to ensure serving of a public purpose.
Land acquisition on behalf of private entities often meets stiff resistance from the owners of land. From this it is evident that compensation amounts which are generally offered to landowners are nowhere near their subjective valuations. Thus there can be no doubt that through the medium of land acquisition on behalf of private entities often transfer of wealth takes place from landowners to owners of private entities for which land is acquired using the eminent domain power.
Most land acquisitions in India and elsewhere are being done on behalf of big industry, implying therefore in most cases transfer of wealth from the poor to the rich. Often the industrialists are given land acquired under the eminent domain for sums considerably less than the amounts which are paid to the landowners implying transfer of wealth to the industrialists from the general public. Furthermore, in most cases the landowners in addition to suffering economic loss on account of compensation being less than the subjective valuation also suffer loss of livelihood. Consequently large-scale land takings for private entities in the long run can be rather inimical to social harmony and cohesion.
* For instance the state of Louisiana amended in 2006 the takings provisions of its constitution to limit the definition of `public purpose'. The amended provisions make it clear that `[n]either economic development, enhancement of tax revenue, or any incidental benefit to the public shall be considered in determining whether the taking or damaging of property is for a public purpose.'
