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By Bhagwan ChowdhryFinancing large-scale projects, such as airports, railways, roads and bridges, require big financial outlays. It is often assumed that governments will develop them. However, governments often do not have sufficient tax revenues to fund such projects. Private lenders are reluctant to loan money for such projects in which revenues may not be realised for exceedingly long periods. But there could be a viable alternative.Many infrastructure projects lead to economic development in areas adjacent to the project itself. This often leads to appreciation of nearby land value. What if the government could formalise a fair and transparent process of selecting the project location that encourages developers at competing locations to bid for the right to host the project? It could choose one of these and even fund it, at least partially. The protocol could be the following:Government announces a project, say, a new university, that would require 100 acres of land.Private agents offer 100 acres to government with a plan to develop several hundred more acres of the surrounding area that will now have higher value.The bidding agent divides the surrounding area into 100 parcels and offers some of these, say, 60 of them, to government.Government randomly picks 60 parcels, and the developer keeps the remaining 40Government sells these 60 parcels in the open market and uses the funds raised to finance the construction of the university.It picks the bid that offers the largest area of land surrounding the university.In this protocol, the private agent —a farmer or a builder — receives fair compensation, without coercion. Each agent decides what the current private value of land is and makes a bid willingly. It is the land that has the smallest current value that would win the bid. This assures allocative efficiency.In this protocol, government does not need to know either the price of the land before the bid, or the private value the agent assigns to the pre-developed land. The 2013 Land Acquisition Act sets an arbitrary ‘four-times’ the market price — that is difficult to determine — and may not reflect the seller’s private valuation in any case as fair compensation.Similarly, government does not need to know the post-development price and value of the surrounding land it receives. This is because it is, effectively, receiving an equity partnership in the surrounding area that will increase in value post-development. Private agents making the offer will ensure that the value of the land they keep is as high as possible and, in the process, maximise the value of the share received by government as well. Competition among agents ensures that the increase in value is captured largely by government and can, thus, be used to fund the project to a maximum degree.The winning bid is easy to identify without estimating the value of the developed land, since the total area offered to government will be the largest for the bidder with the smallest current value of the land. So, government can simply pick the bid that offers it the largest area.So, why should infrastructure financing be organised as a publicprivate partnership (PPP) in the first place? Why not develop such projects entirely as private enterprises? Creating large infrastructure projects generates substantial amount of economic development.While some of this economic development manifests in land price appreciation, which gets monetised and captured by government, there are other social benefits related to community development that can’t be easily monetised.This proposed protocol lowers the cost of the project to government by capturing the value of the monetised externalities, which may be substantial, even if they may not be enough for a private investor.(The writer is professor of finance, Indian School of Business (ISB), Hyderabad)

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