Land is an emotive issue. It is scarce, limited and increasingly becoming difficult to acquire. There is a huge demand for affordable housing, industry, infrastructure, storage, strategic reasons. Due our population and limited landmass, India has one of the highest population densities in the world.

Incidentally, one of the biggest landlords in India is the government itself. Various ministries, departments, universities, armed forces, public sector units, ports, trusts, railways and other arms of the government own acres of land. Much of these lands were bequeathed years ago at throw away prices or acquired for “public purposes”. Some of the land is used for the purpose it has been acquired while a lot is getting used for other purposes or lying fallow.

Unfortunately, there is little definitive data on total land area under government ownership/control and proportion of the same that is productively used or surplus. With proper data at hand, surplus land with the government or quasi government bodies could be made available for residential/industrial/infrastructure requirements rather than always being acquired from private holders.

There are other benefits also.

Aiding Bank recapitalisation

Public Sector Banks (PSBs) are in the news currently, for all the wrong reasons. Huge NPAs and write-offs have seriously depleted their capital and consequently their ability to fund future credit requirement of the economy. As the principal shareholder, the government has been called upon to fund untold thousands of crores to recapitalise the banks.

The relative age of most of the PSBs, the growing demand for land and our inflationary economic history, mean that most PSBs are sitting on a vast pile of undervalued real estate assets. Much of these assets are in places that are expensive, prime, urban spaces in Central Business Districts. A lot of real estate is in the form of underpriced, undervalued residential assets housing officers that do not attribute its accurate value in their total compensation.

A lot of hidden assets are in sundry real estate offices like regional offices, zonal offices, nodal offices, training centers, holiday homes, guest houses etc. In the private sector the rental yields for residential apartments generally range between one to three percent per annum, while for office premises it is six to nine percent per annum, and for retail premises it is nine to twelve percent per annum. For PSBs, no such measures exist as both rent and “value” of the premises are at irrelevant historical levels and market signals fail to emerge and drive management actions.

Given the inaccurate pricing of these assets the opportunity costs of these assets are fully ignored. While their compatriots in private sector and foreign banks have taken systematic decisions to value their corporate offices and weigh against other alternatives, the PSBs have never been bothered with such market related practices. It may be time to change that behaviour.

Land – A recurring large revenue source for the government

Government finances being what they are, innovative sources of revenues are essential to meet the increasing demands on it. Service tax, spectrum fees and mine auctions represent some innovative and significant new revenue sources for the government in the last decade. Land asset monetisation across the vast reaches of the government could be a next mega source of government revenue.

There is an urgent need to evolve a Comprehensive Government Surplus Land Monetisation (CGSLM) program that defines how to identify surplus land, how to bring them under a common government administration, how to develop alternate land use policies, how to value land holdings under various scenarios, how to monetise them, how to share resultant revenues with different stake holders etc.

One way to run a pilot, could be to set up a Land Assets Bank that identifies and consolidates all government and quasi government land holding within say the PSB space. Compensation could be based on a formula that recognises the notified/current market value of these assets and shares the same between current owners and central/state government.

For lands that are in productive use, an effective Sale and Lease Back arrangement could be devised with the Land Assets Bank so that say the PSBs could continue to use their office/residential/training assets. The sale and lease back would ensure a mark-to-market bump up in their capital and therefore their health. It would also force these PSBs to pay market related rents on their offices, residential and other assets to the Land Assets Bank.

This would help create sustainable realty backed debt paper and kick start the realty asset backed market. The advent of institutional investors with long horizon like the insurance and pension players would ensure ongoing demand for quality realty backed paper that provides element of regular income with some inflation protection, helping to diversify their portfolios and improve yields.

Near market prices would force PSBs to strategically look at their real estate sprawls and take commercially sound decisions like consolidation, migration to low cost areas, automation etc. Restating employee residential-quarter rents to better reflect market prices would more accurately state their current compensation (and better compare with the market compensation). Unrelated surplus assets including guest houses, staff training colleges, holiday homes and such other assets would be re-examined in the light of their actual costs/worth.

Every other bank is sitting on real estate assets running into thousands of crores of rupees just in their easy-to-quantify real estate assets.

Consolidation of banks would throw up another whole range of potential savings and thus capital for the sector. Persisting with historic costs is limiting management ability to look into this low hanging fruit. Marking-to-market the real estate assets of the PSBs would inevitably bring more efficient land use pattern within the first few years of its introduction.

Monetising other surplus government land

PSBs could be the starting entities for the Land Assets Bank to pursue. It can then expand its ambit to other quasi government bodies (while maintaining exemptions like defence lands, university land etc.) to ensure closer-to-market pricing and promote rational decision making. This action over the years would not only unlock humungous revenue for the government but the re-pricing would also positively impact GDP in the country while also driving more rational economic decisions by the PSBs, PSUs and other quasi government bodies.

Other large entities that could draw up annual land monetization plans (jointly with the Land Assets Bank) could be Port Authorities, Railways, Post Office etc. Indeed some entities like Railways and Port Authorities are already drawing up plans to monetize their surplus holdings. It would be useful to draw up a common framework and methodology to identify, value, dispose and share revenue these surplus lands. This would avoid competing land parcels depressing prices, minimise corruption risks in the disposal and could also provide a road map of possible land release.

Land is a primary fund source for city states like Hong Kong and Singapore. Indian experience at government monetising land e.g. DDA (entrusted with Delhi’s development) and CIDCO (incharge of city development in Maharashtra) have also been noteworthy. Evolving clear transparent processes are necessary to quash corruption. Land monetization exercise has led to fairly good results in terms of revenue collected, planned development, suitable infrastructure creation, public assets creation, employment generation and self sustainability.

Once steps are taken to evolve a CGSLM program, the Government could then emerge as a supplier of land assets rather than being the constant buyer.

(with inputs from Aashish Chandorkar, @c_aashish)