So Are These New Cities Worth Anything?

By Jane

In every class conversation we’ve had about greenfield developments, from PlanIT to Masdar to KAEC, someone has made the comment that these cities are interesting as a laboratory or experiment. Implicit in those comments is the assumption that the project is likely to be a financial flop, but maybe something useful for society can come out of it. The prospect of a more urbanized, resource-constrained future may argue for more laboratories… but given the reality of a resource-constrained present, project sponsors probably care about making money. Or at least not losing too much money in the name of science.

Through an independent project with Professor Macomber, I am developing a template for a financial model that approaches new city projects from the perspective of an omniscient developer [omniscient heremeaning a) all-knowing, b) interested in optimizing the system and c) the sole source of capital, for simplicity-John].

The template simplifies unique projects into four value drivers comprised of development, operations, demand (i.e. rent and tariffs) and taxes. Additionally there is the option to run a “sustainability case” which compares traditional development with an alternative plan based on different zoning, building quality choices, more efficient transit or water, construction costs, resource inputs, etc. that may cost more upfront but are presumed to have long-term benefits. The objective for this template is threefold: to assist investors in their financial-decision making with respect to greenfield cities, to assist students in comparing different projects, and to assist governments and other interested parties in assessing the value—if any—of sustainability measures at the city scale in new cities.

From the examples we’ve studied in class, project sponsors seem overly focused on the development and operations piece, and not focused enough on whether their cities are going to be an attractive site for businesses and individuals. We’ve discussed this qualitatively in class: “OK, you can build something cool, but is this project livable? Is it attractive to businesses?”

I would like to put some numbers around demand needed to support these projects. Would our conversation on the KAEC development mix have been shorter if we had some confidence that the port could be self-sustaining based only on overrun from Jeddah, whereas the residential development could sustain only 10% vacancy?

Another piece of the puzzle that I think has been under-addressed in our class discussion is taxes. Would a favorable tax regime—for example, providing early developer tax credits or low corporate income rates—be offset by incremental revenue gains to the nation on personal taxes? How much value has to be created from sustainable development to justify a government subsidizing upfront costs? Are these new cities worth fighting for?

Personally, I am susceptible to the romance of a new city, particularly one that espouses sustainability: if Frank Gehry builds a museum, they will come. Similarly one day, surely, it will be advantageous to have clean energy, recycled water, and a quick commute. However, a city that no one wants to live in is a waste of land, material, and money, no matter how good the technology. Simply put, whether a new city is likely to be worth something, and how much it is likely to be worth relative to other new cities, matters.

[John: This Independent Project will culminate in an HBS case study to be used first at the spring workshop of the Zofnass Program for Sustainable Infrastructure. This is a pan-Harvard project involving GSD, KSG, HLS, and HBS as well as a number of global civil engineering firms, large scale urban development consultants, and financial intermediaries.The idea is to refine and make more useful the nascent templates in the Masdar/Tianjin case and in the JACFarticle, “The Role of Finance and Private Investment in Developing Sustainable Cities.”

Zofnass Program:

Jane and I will be interested in your comments on this quest.]



7 thoughts on “So Are These New Cities Worth Anything?

  1. Pingback: Most Commented through Friday, March 8th | Sustainable Cities: Urbanization, Infrastructure, and Finance

  2. I totally agree with your point about taxes. Taxes are a huge lever for incentivizing development, in a new or existing city. Businesses clearly respond to the tax environment, and states and local governments have been using this knowledge for decades to compete for companies and the jobs they bring with them.

    Unfortunately, in the US I think this leads to waste and corporate handouts. For example, Texas spent over $19B on incentives for businesses last year and perhaps not coincidentally led the nation in job growth (adding some 230k jobs) [1, 2]. Surely some of those jobs were from organic growth of home-grown Texan companies, but some were likely poached away from higher-tax states with less aggressive incentive programs (such as when Dallas poached the MoneyGram headquarters from my beloved home state of Minnesota, using incentives of course) [3]. Whether those jobs are in Minnesota or Texas, the United States as a whole is net no better off, and taxpayer money is spent to needlessly shuffle companies around rather than being deployed to more critical functions of government, like education and infrastructure. It’s clear that tax incentives work on an isolated basis. They could be a huge tool for greenfield cities, but national governments should look at these with a critical eye to ensure they’re actually better off in the end.

    1. Louise Story, “As Companies Seek Tax Deals, Governments Pay High Price”, The New York Times, 1 December 2012,, accessed March 2013.
    2. America’s Top States for Job Creation, CNBC,, accessed March 2013.
    3. Sam Black and Jan Buchholz, “MoneyGram is moving its HQ to Dallas”, Minneapolis St. Paul Business Journal, 23 September 2010,, accessed March 2013.

    • By John Macomber

      The question of whether tax breaks in one locale leave the whole worse off is an interesting “tragedy of the commons” scenario that culminates in a “race to the bottom” of who can give the most tax breaks. On the other hand if all your region has to offer is tax breaks and no other benefits like transit, industry clusters, energy, water, weather, population, recreation, ports then you (the region) are pretty bad off anyway. Does this set of regionally based tax incentives then lure businesses away from where they naturally would otherwise be if they only looked at cluster theory? So at the federal level (for all citizens in aggregate) it’s doubly harmful to a) lose the tax revenue and b) perpetuate a non-market site selection process? This maybe goes beyond Vikings vs Cowboys in NFC.

  3. I too am struck by how difficult and complex this task is.

    One interesting layer on top of tax regimes is how state and federal taxes play in to the mix. When Cate Long talks about cities as “cash flow machines”, I think about how some cities are subsidized by the taxes paid by citizens in other parts of the state, or vice versa.

    One of the things I struggle with here is how people move to cities for different reasons, and have different preferences for specific tradeoffs. Some folks may be more comfortable with higher tax rates, if it comes with more services. Some businesses will value lower energy costs more than others. My disposition is to think that people will move for jobs, so that making cities attractive for businesses will result in making them attractive for workers.

  4. Pingback: How can we best talk about people in a finance course? | Sustainable Cities: Urbanization, Infrastructure, and Finance

  5. By WXZ

    What a fascinating and difficult project! I am not finance expert, but I agree that it is important to put numbers behind the qualitative analyses, even if the range of outcomes is quite large. It would give additional data points and insight into the project in different scenarios to help with the decision-making process.

    I would like to provide some additional aspects to some of the categories you outlined, in case you find it helpful.

    Attractiveness to Residents and Businesses

    Your assumptions seem to be that 1) the city is built in a place with a market that operates largely by the invisible hand, and 2) people have no mobility constraints. In some of the developing countries that are building many new cities, neither of these two conditions holds. For instance, in China, there is a strong state-planned economy and a rigid residency system called the Hukou system that make mobility for the average citizen extremely difficult (which is tied to many things including access to education, health care, housing, and compensation payouts) unless allowed by the state. Similar systems exist for other developing countries like Vietnam, where there are many new cities being built. In these places, the state can demand domestic companies to relocate or expand to the new city and incentivize many residents to move by allowing anyone who moves to easily get residency status in that new city (such as in the cases of Chongqing, Chengdu, Shenzhen, and Guangzhou in China).

    In this case, the financial model may not need to change too much, aside from allowing the user to directly overwrite the formulas and input their own projected numbers related to resident and business attraction. You are much more of a financial expert than me, so I will not continue guessing what may be the best way to address this issue.

    Tax Regime

    Tax incentives are very fascinating, and have driven much of the growth in FDI in industrial parks around the world. China probably has a wealth of data on this, since every city I have visited there seem to have multiple industrial parks that give huge incentives for companies in targeted industries such as no taxes, free office space, and free residence for employees for up to a certain number of years. Moreover, there are national programs, too, for attracting top domestic and overseas Chinese talent to these industrial parks. Some of these parks have been very successful, whereas others are just sad. If you can get access to this data, I think you would be able to find come up with some very interesting hypotheses to ignite further research in this area.

    Good luck! I am very interested in reading your IP once you are done if you are okay with it.

    • By John Macomber

      Here is a pure cash-flow-for-services point of view, adapted from a post on Reuters by Cate Long.

      “I think of cities almost entirely as cash flow machines that collect taxes and provide social services.

      “Cities are legal entities that are incorporated to provide essential services; especially police, fire, education and water and sewer systems. Depending on the state, cities have legal authority to enter contracts, collect specific types of taxes and maintain judicial systems. Many cities also provide more expansive social services including care of the elderly and disabled and maintenance of parks and hospitals.”

      And that’s it. Long writes about municipal bonds and the post is about “The View From Mun-Land.”

      Naturally a student in our class might wonder a) how to you account for an increase in economic value to residents? and b) how do you account for a quality of life?

      Cate Long in Reuters Muniland

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