Charter Cities in a Box

I recently tweeted that the Charter Cities Institute is “Gonna make charter cities replicable. Charter cities in a box.” I’d like to unpack what I mean by that.

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I recently tweeted that the Charter Cities Institute is “Gonna make charter cities replicable. Charter cities in a box.” I’d like to unpack what I mean by that.

First, the basics. Charter cities are new cities with a special jurisdiction that allows them to adopt best practices in commercial law, as approximated by the World Bank’s Doing Business Index. The concept is straightforward, but the implementation is less so because of two main challenges: building a new city and creating a new governance system. Building a new city is challenging enough. Passing legislation and creating a new governing system for commerce is even more difficult.

Our goal at the Charter Cities Institute is to lift tens of millions of people out of poverty. Therefore, a single charter city is not enough. We’re working to standardize the process of creating a charter city to make doing so a replicable model. Success means facilitating the creation of dozens, if not hundreds of charter cities around the world. The first step is breaking down each of the challenges into their constituent parts.

NEW CITY

Location identification: On of the most important parts of building a new city is choosing the location. There are several important factors in location selection.

  1. Urbanization rate: What is the urbanization rate of the host country? High urbanization rates mean demand for new cities.
  2. Trade patterns: What are the trade patterns in the region? Can you bet on growth in trade, if so, what industries is that growth in?

Satellite city vs. new city: A satellite city is a city built in the growth path of an existing city. The advantage is access to the labor market and infrastructure of the existing city. The disadvantage is higher land cost. A new city is built without a connection to existing infrastructure. The tradeoff: construction costs are higher, but land is cheaper.

Land acquisition: How can sufficiently large tracts of land be acquired to justify the infrastructure investments of building a city? There are several approaches:

  1. Buying: Buying is capital-intensive but ensures that your vision can be implemented fully.
  2. Joint venture: Securing a joint venture with local owners reduces capital requirements for land acquisition but limits the upside of the company building the charter city.
  3. Options to buy: Acquiring options to buy that can be exercised over several years minimizes capital requirements, while still allowing full ownership.
  4. REIT: A real estate investment trust allows control of the land with minimum capital expenditures; however, many low-income countries are unfamiliar with REITs which could make negotiations difficult.

Phased approach: How can charter cities be built in a phased manner to demonstrate viability without huge sums of initial capital investment? What is the minimum viable charter city?

  1. Phase 1/anchor tenant: There is a coordination problem in attracting the first businesses and residents to the charter city. Overcoming that  problem requires identifying an anchor tenant and attracting them. What are the requirements for identifying and attracting that tenant? Examples include an industrial park, a university, or a business park.
  2. Phase 2: After you identify and attract the anchor tenant, how do you scale? What are the secondary and tertiary industries you should attract?

Financing: Real estate projects are typically debt financed. However, charter cities have longer time horizons and in the early stage do not have assets to do due diligence. Further, many countries which stand to gain the most from charter cities have currency risk which raises the challenge of debt financing.

  1. Early stage: How is early stage financing attained to pay for the master plan and due diligence?
  2. Middle stage: How is the capital required to build out the first phase/anchor tenant acquired? What are the terms of the capital?
  3. Late stage: Once a track record is established, how are the later stages of the charter city financed? Late stage charter cities require billions of dollars of investment.
  4. Currency risk: Many charter cities will be built in countries with unstable currencies. What can be done to limit foreign exchange risk?

GOVERNANCE

Legislation: Charter cities have a legal framework which gives them a blank slate in commercial law.

  1. Passing legislation: How can we work with governments and other stakeholders to pass legislation which creates the legal framework for charter cities?
  2. Continued support: How can we ensure that the government continues to respect the legislation in the future? Are there any legal mechanisms which can tie the governments hands regarding future expropriation?

Multilateral organizations: Multilateral organizations, e.g. the UN, World Bank, African Development Bank, can support charter cities in a variety of ways.

  1. Tacit support: At a minimum multilateral organizations can tacitly support charter cities by speaking at related events, mentioning charter cities in reports, etc. This is important because it serves to legitimize the idea of charter cities in potential host countries.
  2. Technical support: Multilateral organizations could also offer technical support in implementing charter cities, from drafting legislation to creating the governance framework.
  3. Investing: Development Banks could finance or underwrite loans to charter city developers.

New governance structure: What does it mean in practice to create a governance system in commercial law from scratch?

  1. Incentives: What is the proper incentive structure for the governing body? Who are they responsive to?
  2. Legislation: How are new laws proposed and enacted?
  3. Phased approach: What is the minimum viable governance system for commercial law that can serve as proof of concept?
  4. Labor/business registry/etc: What does it mean to create a commercial legal system from scratch? How are labor laws, a business registry, a new tax administration, etc, implemented?
  5. Standardization: To what extent is it possible to standardize aspects of the new governance structure?

As each of the aspects becomes more clearly defined and understood, charter cities move from an ephemeral concept to another business proposition—a new asset class even. Once this happens it will be possible to subcontract for the variety of different services required to build a charter city, from master planning, construction, administration, etc.

In short, for charter cities to reach their potential—that is, to lift tens of millions of people out of poverty and to demonstrate the power of liberal institutions—one isn’t enough. We have to build an entire ecosystem and let a thousand charter cities bloom.