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. Continue reading

Somerville’s Green Line Extension

By Matt Bornstein

Last December, Boston’s public transit authority began construction on an extension of the Green Line light rail system.  Today, the Green Line runs from the near western suburbs, through downtown Boston, into East Cambridge.  The planned expansion would add seven stations serving Somerville and Medford, Cambridge’s neighbors to the north.  (See map; the extension is marked as a dashed green line.Bornstein 1

If you are an average HBS student, your response to this news is probably, “what is the Green Line?”  For a typical Boston resident, the reaction is probably more like, “why extend the slowest, most cramped, least reliable public transit line in the country?”  In Somerville, though, this project has people buzzing and emotions flowing.

Home to about 80,000 people, Somerville is the most densely populated neighborhood in Boston and among the densest areas in the country.  Historically, its residents were working class and diverse (for Boston) at “only” 70% white.  In the mid-1990s, however, gentrification hit.  Condos, restaurants, and shopping areas began to move in.  Property values quadrupled from 1991-2003.  Long-time Somerville residents came into contact with new yuppie entrants and, worse, a massive wave of young hipsters.  The causes?  Many, including urban expansion, the repeal of rent control, and thriving businesses in nearby Cambridge and along I-95.  The trigger?  The Red Line subway added one stop in Somerville.[1]

You can see, then, why seven new stations are a cause for controversy.  Most residents – or at least the most vocal – support the project and have berated the state for delays.  Lawmakers, including the governor and local congressman, are touting the recent groundbreaking as a major success.  Long-time Somerville residents, however, are on the fence.  And looking below the surface reveals the usual brewing disaster of a Boston public works project.

The Green Line extension is currently slated to be completed in 2019 at a cost of roughly $1.3Bn.[2]  Sounds reasonable for a project of this scale.  But there are a few problems:

  1. No one knows who will pay for it.  The state is seeking ~$550M in financing from the federal government, money which is by no means guaranteed.  The balance (~$750M) is expected to come from state bond funds which have not yet been approved.  Meanwhile, the MBTA is facing revenue shortfalls and the Mass. Department of Transportation is fighting an uphill battle for moderate increases to its operating budget.  Public-private partnerships are being put to good use (e.g., real estate developments near stations in exchange for needed right-of-way) but will not meaningfully reduce the $1.3Bn figure.  (More financing details here.)
  2. Construction started two months ago, and it’s already five years behind schedule.  The state is legally obligated to complete this project by 2014, a deadline imposed by a Big Dig lawsuit.  Right now, though, 2019 looks optimistic.  As a result of the delay, the state must simultaneously pursue other, near-term environmental improvement projects.  This has the potential to dramatically increase costs and create a vicious cycle of further delays caused by distraction and diversion of resources.
  3. Political cover is shaky.  Massachusetts Governor Deval Patrick has championed this project as a tangible part of his legacy.  Rumors are circulating that Patrick may leave his post in 2013, though, to fill a spot in the US Senate or another federal position.  If he departs, the project could face even steeper delays.  At the December groundbreaking, Congressman Michael Capuano was quoted as saying, “We need to get as much of this project done and committed in an irrevocable way before [Patrick] leaves office.”

The ingredients are there for this to become an albatross around the neck of the next governor.  It’s hard to argue against increased mobility and reduced pollution in Boston’s most densely populated neighborhood.  But whether the project will become another public works sinkhole – and drive out the last of old Somerville – remains to be seen.

Bonus: Boston’s own “MRT vs. BRT” evaluation process ( light rail vs. BRT vs. commuter train)

Bornstein 2

Table: Tier 1 Green Line Extension Alternatives Analysis (Source: GLX project)

Bornstein 3

Table: Tier 2 Green Line Extension Alternatives Analysis (Source: GLX project)

[1] Wikipedia & local knowledge

[2] “Preliminary Engineering Approval for the Green Line Extension (GLX) Light Rail Transit Project,” 6/11/2012

The Quest of Costa Rican Buses

By Jannis Koehn

Last spring, I visited Costa Rica for the first time after more than ten years. What I found most astounding was that the buses that took me through San José and across the country seemed to be the same old models I had seen back in 2000. Haven’t oil prices soared from $10-20 then to $90-110 today? Haven’t manufacturers developed modern fuel-efficient engines since? So why did operators not invest in more fuel-efficient buses? Costa Rica is proud of its 90% renewable power sector and successfully developed an image as a heaven for eco-tourism. Yet, the country’s public transport system lags these ambitions. Today, Costa Rica imports 15-20 million barrels of petroleum products annually, spending around $2-3 billion, and the air in San José is full of diesel soot. The paradox of old buses is a widespread phenomenon in the developing world – and, one could argue, even in some developed countries.

Koehn typical city bus  Koehn long distance bus

Pictures: Typical city bus (left) and relatively modern long-distance bus in Costa Rica

As an ordinary citizen, I cannot change government policy. But there may be scope for entrepreneurship, social or for-profit. On a lengthy bus trip to the country’s North, I started wondering what the economic rationale for bus operators was that prevented them from investing in new models, and I did some basic calculations. Factoring in basic variables such as annual mileage, fuel economy, diesel prices, bus prices and capital costs, I concluded that investing in more efficient buses would for many operators be economically favorable, at least for long distances. Given that most buses around were still old and inefficient, and unless diesel subsidies or import duties on buses distorted the market, operators may simply not have access to sufficient capital to buy new buses – that is where a startup, a bank or an international institution may help out.

For this article, I researched government policies and refined my assumptions, but the results did not change. Import duties on buses are negligible (<5%[1]), and I did not find evidence for diesel subsidies despite prices of USD 5.00 per gallon. So, long distances more than for city routes, and with used rather than new buses, replacing old buses seems to make sense. Here are the results for different capital costs in one graph.

Koehn savings estimate

The underlying back-of-the-envelope calculations look as follows:

Koehn savings calculation

So, what can businesses and entrepreneurs do to enable Costa Rican bus operators to make investments that are economically and socially beneficial? As a bus manufacturer, one could provide leasing arrangement to alleviate upfront capital constraints. Volvo or Daimler might also partner with the World Bank or other development institutions to create a fund that bridges capital needs. As an entrepreneur, one may set up a small investment fund, or tap crowd-funding as a source of capital, and lease out the buses. As a Harvard student, one may engage HU’s Shuttle Service and encourage a renewal of buses on campus, recycling the current ones cheaply to Costa Rica. That would also solve another problem: Noisy buses that inhibit quality of sleep here in Cambridge.


Rationalizing Private Investment in Slum Redevelopment: A Cost/Benefit Framework for Local Government

By Anonymous

In the Dharavi case, we discussed ethical dilemmas that arise when local governments incentivize private investment in large-scale slum redevelopments at the risk of displacing residents; namely, how do you avoid widespread social disruptions while improving quality of life; or unlocking value in this commercial area for the “public good”? With no first hand experience in Dharavi and limited knowledge of its political and financial dimensions, it is difficult to answer. Yet, in drawing upon a basic “cost/benefit” framework, I would recommend that stakeholders on all sides keep two critical facts in mind about the role of local government.

First, thriving cities require baseline conditions that promote a high quality of life and level of economic vitality, such as sanitation. This has been a longstanding area of service provision for local governments globally, making Mumbai’s case largely uncharacteristic.  Existing conditions in Dharavi, however, represented some of the major public health risks and economic impacts emanating from slums across the city, given that “only 17% of residents in Mumbai slums had access to household toilets” (Iyer et al 2011). From the social perspective, this situation has enormous costs, such as susceptibility to disease, other public health concerns, low quality of life, and barriers to economic and social mobility. From the economic perspective, this creates opportunity costs in the form of lost productivity spent from hours waiting in line for a small number of public toilets, avoided private investment, and driving away prospective tourists and businesses due to highly insanitary conditions. Elevating Mumbai to “world city” status required its local government to address these challenges not just in Dharavi, but in slums citywide; as well as to raise the resources to do so. Private investment therefore represented an opportunity to create long-term public value through redevelopment in the form of subsidized housing, improved sanitation, and (eventually) tax revenue to reinvest in the city more broadly.

Second, sanitation challenges in Dharavi and other Mumbai slums simply could not be addressed without adequate resources. With over 700,000 residents in a commercially attractive location, Dharavi was an “entrepreneurial slum” that likely imposed untenable economic costs on Mumbai’s local government, in terms of informal business activity and previously mentioned impacts depriving it the ability to provide sanitation services citywide. The informal (i.e. “untaxed”) enterprises in Dharavi alone “were estimated to produce goods worth about $600 million annually”, “more than the output of several newly established economic zones” (Iyer et al 2011). This value, if recaptured in the form of taxes and formal businesses, could go a long way towards paying for necessary “quality of life” improvements in slums across the city, such as sanitation. With the right approach, private investment could perhaps be communicated as a necessary catalyst for value-creation that addresses the self-interests of slum residents, even if Dharavi residents were to flee to other slums that were to eventually improve. Other issues aside, reframing the debate in terms of citywide costs versus benefits could provide an understandable context for the local government to act.