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World’s Private Cities Yet to Attain Conditions for Success

By: Mark Lutter - Oct 29, 2014, 11:24 am

EspañolInterest in private cities — cities that are governed, or owned, by private corporations — has been increasing. A private city differs from traditional cities, in that a single developer owns the land. The developer then makes decisions that are traditionally made by city governments, such as building roads, providing security, and zoning.

I have previously written about the theoretical case for private cities. My analysis can be tested against several private cities which are currently being constructed. Here I shall offer a critical overview of three private cities: Eko Atlantic in Nigeria, Lavasa in India, and King Abdullah Economic City in Saudi Arabia — in addition to a discussion of the ZEDEs in Honduras.

Understanding these examples holds lessons for future private cities.

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A satellite image of Eko Atlantic in Nigeria, being built on reclaimed land from the ocean. (EA Facebook)

However, before one considers the examples, it is useful to consider two reasons why private cities might be preferable to traditional city governments. First, private cities could provide better administration of public goods (e.g. security, roads, sewage, and clean water), because the income of the developer is linked to his ability to attract residents. City owners are incentivized to provide valuable goods and services.

The second, and more important reason, is that private cities incentivize institutional change. Economic freedom leads to economic growth, which increases the value of the land on which the city resides, benefiting the developer. As such, private-city owners have a strong incentive to lobby their central or state governments for a degree of institutional autonomy to increase their competitiveness.

Whether or not private cities provide better public goods and services or achieve institutional autonomy is ultimately an empirical question. A preliminary answer can be gleaned by considering existing private-city projects.

Lavasa, a city planned for 300,000 people between Pune and Mumbai, is being built and governed by Lavasa Corp. Rather than democracy, decisions about the provision of public goods, electricity, water, and roads, will be made by Lavasa Corp, nominally overseen by a Special Planning Body — a governmental organization. The company is investing an estimated US$30 billion in Lavasa.

Unfortunately, Lavasa Corp seems to be pursuing a detrimental version of institutional autonomy. As Persis Taraporevala of Open Democracy reports, “A customer cannot sell or lease out her property without consent from Lavasa Corp. In case a customer decides to sue Lavasa Corp, the contract stipulates that this could only be done through a process of arbitration in Mumbai. Lavasa Corp has the right to choose the arbitrator and all proceedings have to be conducted in English.”

Rather than eliminate barriers of entry to new businesses, Lavasa Corp is creating a legal system which favors them. This is likely to hurt them in the long term, as few businesses will invest in a system with such uncertainty.

The second city, Eko Atlantic, is perhaps better described as an enclave within a city, Lagos — built to house 250,000 people on reclaimed land from the Atlantic Ocean. Like Lavasa, it will be privately governed: security, electricity, and water will all be supplied by South Energyx Nigeria Ltd., the company building Eko Atlantic.

Like Lavasa, there is little reason to believe Eko Atlantic has any institutional autonomy. While figures such as Bill Clinton have praised the project, there is no indication that starting a business there will be any easier than in the rest of Nigeria. If Eko Atlantic wants to be the Hong Kong of Africa, first they need to understand what made Hong Kong what it is today: private property rights, the rule of law, and the ability of any citizen to start and grow a business.

The most promising private city is King Abdullah Economic City in Saudi Arabia. Described by CNBC as “The world’s first publicly listed city,” Saudi Arabia understands creating a new city is more than just a large construction process. Attracting entrepreneurs requires offering them a transparent and just legal system. It is on this dimension that King Abdullah Economic City shows true potential.

A “friendly business environment” is one of the pillars upon which Saudi Arabia is building the city. King Abdullah Economic City will have a “business friendly regulatory environment which is competitive with other free zones globally.”

Just as important, Saudi Arabia is using King Abdullah Economic City to experiment with social freedoms, especially for women, as well as economic freedoms. The New York Times describes the city as an “island from which change would seep out.” While the degree of social freedom in King Abdullah Economic City remains unclear, at the very least it will be greater than the rest of Saudi Arabia.

While not as far along as the above projects, the Honduran ZEDEs have the most potential. Regions of Honduras can opt out of Honduran civil and commercial law and import legal and administrative systems of their choosing. This allows them to follow the tried and true mechanisms for stimulating economic development such as Hong Kong and Singapore. Further, by constructing parallel criminal justice systems they are able to escape the endemic corruption that plagues Honduras.

If a private city is to succeed, it must be better than existing alternatives. Providing superior public goods is one way. Providing rule of law, private property rights, and encouraging entrepreneurship will attract even more investment.

One hopes that future developers can learn from the cases above and better improve the standard of living of those living in undeveloped and developing countries.

Edited by Fergus Hodgson.