Yes! You need to apply the JRoute function to it - this effectively hasn't changed since Joomla 1.5 so you're fine using it on Joomla 1.7. See the Joomla doc here for more info for the 11.1 platform though.
So you need to use something along the lines of:
<a href="<?php echo JRoute($params->get('loc_nav_item'));"></a>
Also tell your client Joomla 2.5 has no visible differences to Joomla 1.7 except has a tonne of extra security features missing in Joomla 1.7. He's asking for himself to be hacked!!