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1.1.1 Land Availability and Acquisition

The land or site for building the asset may already be available, or it may be in the hands of the authority, and available for use.

However, in most of the cases it is not. In such cases, land has to be acquired. This is especially complex in linear infrastructure, such as roads and rails where there may be multiple owners.

The land may be the site where a social facility or a process plant (for example, a waste water treatment plant) will be built, or it might be for facilities related to transport infrastructure (for example, stations in a rail project, depots in a light rail one). Alternatively, it may be a "right of way", that is, the corridor where a new road or highway, or rail line, will be located.

Normally, the title of ownership of the land will remain in the hands of the authority which will grant to the private partner, through the contract, the legal right to use the land to build and manage the infrastructure asset (for example, by a lease or concession). The authority is usually the only party with powers to expropriate the land from the existing landholders, although in some countries this power can be delegated to the private partner (giving it the title of "expropriation beneficiary"). See below.

If the land is not available at the time of the commercial close, which is common in linear infrastructure projects, there is a risk both in terms of costs and time, as obviously construction can only progress once the land is available. Estimating the cost of acquisition (especially when there are multiple owners) is very complex and uncertain, and it is common in many countries that the final price is defined by a court (mostly in civil code countries).

This PPP Guide considers it best practice for the procuring authority to retain the risks related to both the cost and availability of the land, including any costs of relocating current occupants (legal and illegal). This is because the private partner will normally build in significant contingencies to cover the risk of higher costs, including the uncertainty over the time it will take before the land is available to build.

In this sense, it is good practice for the authority to directly manage the land acquisition, but in some countries the private partner may do it under delegation. In such cases, it is paramount for the authority to retain the risk (and reward), that is, directly assuming the final cost of the acquisition and consequences of potential delays.

There may, however, be circumstances and established practice where the private partner not only manages the acquisition and finances it, but assumes some level of risk. In these contexts, if the past experience has been satisfactory, and the level of uncertainty is considered moderate, it is good practice to limit the risk exposure of the private partner and/or share the risk thorough a specific mechanism. For example, this could be done by defining a cost baseline that is based on estimates by the authority as well as granting compensation equal to a certain percentage of over costs, including a cap in the total cost to be borne by the private partner. When such provisions are in place, they should also cover the reverse situation so as to also share a portion of any savings in cost over the baseline cost defined in the contract.

When the authority retains the risks and direct management of the expropriation process (for example, road projects in Mexico or Nigeria), it is common and good practice to only tender out the contract once a significant portion of the land is already acquired and available because regardless of the direct assumption of the costs (and therefore the risk of costs) by the authority, the likelihood of delays in the acquisition plan is significant. Therefore, there is a risk of delay in the overall construction period. Whether the delay risk due to the unavailability of land is clearly established in the contracts as a relief or even compensation event, conflicts and problems will emerge in such situations. These can be avoided if the acquisition program is significantly advanced when the contract is signed (or even tendered)[1].

Land acquisition risks will be exacerbated if there are indigenous or native titles over the land, which is a relevant matter in a number of countries. In these cases, it is even clearer that taking back the risk, and even directly managing it, provides better Value for Money for the authority. The government is better placed than private companies to resolve this risk since, at the end of the day, it can always pass new legislation.

 

[1] In fact in some countries (for example, in Mexico), it is common practice in the project finance of roads that lenders request, as a condition to lend, that a very significant portion of the right of way be available at financial close.

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