By John Clayton
The Phu My Hung class seemed to present several disheartening takeaways. Of the last several cases we’ve examined, Phu My Hung was objectively considered to be the most “successful” master-planned development. And yet, our conversation highlighted many issues that confronted this successful development: the long time horizon for invested capital and foregone returns from alternate investments, the unique (and likely non-replicable) circumstances involving land acquisition and government support, and the disproportionate level of demand catered towards expats with 10x per capita income levels – i.e. the wealthy. If this development could only work under this limited set of circumstances, with evident tradeoffs, and only for the wealthy, then how can we possibly expect to reasonably accommodate an urbanizing wave of 3 billion mostly poor people in the coming decades?
Enter the charter city – a city that’s designed, developed, managed and handled by a business or external entity.
Charter cities function something like this: an emerging market country leases a greenfield portion of its land to an outside developer, usually a country or a consortium of businesses (i.e. a tech cluster). This external party leverages their expertise to develop the land, build out the urban infrastructure, and incentivize business and labor (both domestic and international) to move to the city and build an employment base. For example, Mozambique offers a tract of coastal land to Singapore; Singapore then leverages its urban development expertise and trade connections to build out a city cluster that attracts Mozambicans (and expat talent), as well as businesses looking African market access or lower-cost labor. This concept is particularly conducive to emerging market countries facing significant resource constraints, high population growth rates, and a lack of financing and technical expertise to develop a city themselves.
Who benefits? Everyone does. The local country benefits from targeted economic development, external urban infrastructure expertise, master planned cities, and an escape valve for its increasingly crowded existing urban areas. The investor country benefits from development and construction work for its companies, quasi-sovereign governmental jurisdiction (a key constraint we’ve seen to successful development), and recognition within the global community. Businesses benefit from access to lower-cost labor, new markets, and lower-risk operating environments (similar to Singapore’s involvement in the Sino-Singapore Tianjin Eco-City Project). Most importantly, poorer populations benefit from increased economic opportunities (in a word, jobs) and access to a well-constructed urban environment.
Now for the numbers – how would these charter cities be financed? Funding for city infrastructures could come from several sources: (1) similar to KAEC or Phu My Hung, cities could benefit from build-operate-transfer contracts for critical infrastructure components – water, electricity, roads; (2) increasing land values; (3) taxes or payments derived from economic activity; or (4) initial subsidies provided by international development organizations or donor countries. Partial risk guarantees from either developed states or multilateral financial institutions such as the World Bank could lower risk profiles and underwrite private-sector investment opportunities, further reducing investment costs.
Charter cities are by no means a novel idea – history is littered with previous examples of companies developing urban landscapes, from the East India Company outposts of the seventeenth century to the 20th century textile mill towns that dot the North Carolina landscape. Modern-day Singapore now leases several islands from Malaysia to accommodate its growing population and economic activity. Of course, charter cities are not without their critics – detractors complain that such systems reduce sovereignty and are disguised forms of neo-colonialism. Still, though, could this be a novel multilateral way of accommodating the next wave of urban inhabitants in emerging markets in a sustainable and economically cost-effective manner?