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