Valuation methods in compulsory acquisition: replacement cost, market value and the gap between them

1. Three approaches and their assumptions

Valuation practice offers three families of approach. The comparable sales approach infers value from observed transactions in similar assets. The income approach capitalises the stream of income an asset produces. The cost approach establishes what it would cost to reproduce or replace the asset, generally with an adjustment for depreciation.

Each carries assumptions that compulsory acquisition strains. Comparable sales assume an active market in similar assets — often absent for agricultural land under customary tenure, where transactions are infrequent and prices, where observed, may reflect distress or kinship rather than open-market conditions. The income approach assumes a measurable and stable income stream, which smallholder mixed cropping does not readily provide. The cost approach is the most tractable but depends entirely on the schedule of rates applied.

2. Where replacement cost departs from market value

International standards require compensation at replacement cost and are explicit that this is not the same as market value. The departure occurs at three specific points, and they are worth separating because projects tend to get the first right and the others wrong.

The first is depreciation. Market value for a used structure reflects its depreciated state; replacement cost asks what it costs to build an equivalent structure new, without deduction. The rationale is straightforward — a household given the depreciated value of its house cannot rebuild an equivalent house — and the requirement is unambiguous across regimes.

The second is transaction cost. Acquiring a replacement asset involves fees, taxes, registration and often travel and time. Market value excludes these; replacement cost includes them, because a payment that leaves the recipient unable to complete a replacement purchase has not restored them.

The third, and least consistently applied, is the temporal one. Rates fixed at the time of valuation and paid years later have been eroded by inflation and by land price movement that the project itself often caused. Replacement cost is a condition to be satisfied at the moment of payment, not a number fixed at survey.

3. Rate-setting and error propagation

Most compensation in a large programme is not individually valued. It is computed by applying a schedule of unit rates — per square metre of a structure type, per mature tree of a species, per hectare of a land class — to enumerated quantities. This is unavoidable at scale and it means a single rate error is not one error but thousands.

Two properties follow. Errors are systematic rather than random, so they do not average out and they affect whole classes of claimant. And they are discovered late, typically when a payment schedule is challenged, by which point earlier payments at the erroneous rate have created a precedent and an equity problem.

The mitigations are procedural: derive rates from documented market enquiry rather than from a previous project's schedule, record the derivation, and revisit rates on a defined cycle rather than when challenged.

4. Method, not number

Valuation disputes in resettlement are rarely disputes about arithmetic. They are disputes about method: whether depreciation should have been deducted, whether the comparator transactions were genuinely comparable, whether the tree rate reflects a mature productive tree or a sapling, whether the rate applied was current at payment.

A methodology that has been documented can be defended, adjusted or shown to be reasonable. One that exists only as a spreadsheet of outputs cannot be defended at all, which is why the absence of a rate decision record is a more serious finding than a rate that turns out to have been somewhat low.