Charter Cities Podcast Episode 4: Mwiya Musokotwane on Nkwashi and the future of an intercontinental Africa
Nkwashi is a private charter city that is currently being built in Zambia to house around 100,000 residents on completion. Our guest on the show today is Mwiya Musokotwane, the co-founder and CEO of Thebe Investment Management, a Zambian private investment firm that is the developer of Nkwashi. He is here to talk about this project and the challenges and aspirations involved specifically, as well as those more broadly positioned in an African context. We look at questions of what it means to create a private city, getting an economy started and the key factors that need to be addressed for Africa's economic future. Mwiya gives us some insight into the timeline of building Nkwashi and why building a charter city takes longer in developing economies. We discuss financing and the ways that the project has been laid out to pay for itself over the next ten or so years. The conversational so covers skills development, talent attraction and culture building and we look at how cities and companies both do this as well as the clear differences. Mwiya makes a strong argument for the role of institutions and networks in establishing the overarching culture of a city, something that he has very certain aspirations about for Nkwashi. The conversation also covers the focus on technology as Nkwashi's main industry and attraction, and we unpack the mercantile model that is planned. Listeners can look forward to hearing about a future city, some great perspectives on African economies and the challenges that face a project of this size. Mwiya also explains what he admires about Singapore and the lessons he has learned from their example, so tune in to hear all this and more! Links from today's episode can be found below the transcript.
Transcript (edited for clarity):
Mark: Hello and welcome to the Charter Cities Podcast. I’m your host, Mark Lutter, the Founder and Executive Director of the Charter Cities Institute. On the Charter Cities Podcast, we illuminate the various aspects of building a charter city. From governance to urban planning, politics to finance, we hope listeners to the Charter Cities Podcast will come away with a deep understanding of charter cities, as well as the steps necessary to build them.
You can subscribe and learn more about charter cities at chartercitiesinstitute.org. Follow us on social media, @CCIdotCity on Twitter and Charter Cities Institute on Facebook. Thank you for listening.
Our guest today is Mwiya Musokotwane. He’s building Nkwashi, a private city in Zambia that will house 100,000 residents. In this episode, we discuss what it means to build a private city, how to jumpstart an economy for that city, as well as what Africa needs to do to generate economic development.
Mark: Welcome to the show, Mwiya.
Mwiya: Thanks for having me.
Mark: To start, tell me a little about Nkwashi. What are you building?
Mwiya: We're building a satellite town to Lusaka. It’s basically a private city that we're building; anchored by education and technology-based services. We just launched the first phase of that economic anchorage this last month. We launched Explorer Academy, which is a tech hub. It's part Lambda School in that it trains people to be software developers and digital designers. Then it’s part Andela, in that it deploys those people into actual jobs once they graduate. It's part staffing company and part skills or vocational training.
Mark: Well, what does it mean to build a private town, to build a satellite city?
Mwiya: The first step is to acquire a large enough tract of land. In our case, we were lucky enough to have previously owned a cattle ranch, about 3,100 acres in size. Then we master-planned that into a medium density community. About 100,000 individuals will live at Nkwashi. It’s not just a gated community, in the sense that we're just building residential dwellings. It's a town in the sense that we also accommodate commercial development with some recreational facilities designed into the development. We also have infrastructure that we’re building to support all these various activities.
Mark: What's the timeline? How long does it take to build a satellite city or large tonwn?
Mwiya: It really depends on what economic tailwind you have. If you're in a country that has a booming economy, I imagine something could be done in under 10 years. If you are building it in a place like Zambia, which right now has several economic challenges, it takes a lot longer. Our initial estimate when the economy was doing much better in Zambia was about 10 years. Now our view is that it's going to take at least another 10 years in addition to the original 10 years before this is actually fully finished.
Mark: Where does the demand come from? Why do Zambians want to live in Nkwashi? What is the value proposition that you're offering them?
Mwiya: There's a couple things. One is that we have structural demand factors. There's a large and very deep housing deficit in Zambia, so there aren't enough homes relative to the demand for homes. That's one. The second thing is people want to live in well-designed, well-serviced communities, where they have access to the type of things that most people in advanced economies take for granted. Running water that's piped to your home, good roads, electricity, green spaces, parks, schools and such like.
Many emergent communities in and around big cities in Zambia, as is the case across Africa, are what we call sub-serviced, in the sense that they might have a dirt road on the street as opposed to a paved road. Often, they will have to drill their own borehole and create your own water supply. You have to also create a septic tank on your site, so you deal with your own solid waste disposal and sewage treatment on-site. They'll also often have to then engage the electricity utility themselves and say, “Hey, I'm building my home. I need to have access to a transformer or to an electricity line.”
And then they will have to make those connections themselves, often working hand-in-hand with the utility. There's a lot of DIY involved in the way that people currently build their housing. Whereas, what we're building is something that's much more typical of what you'd see in the US or other such advanced economies, where a person literally just plugs in and doesn't have to think about all the other considerations.
Mark: You're creating these public goods that are often taken for granted in more developed economies. In Zambia and other parts of Africa and the Global South, they don't have access to good roads or to clean water. And when they do have access, it requires a high upfront per unit cost to do it. By creating this large subdivision, you can lower the cost of hooking up to various public services.
Mwiya: Yeah, that’s exactly right.
Mark: Building out this infrastructure is expensive. How do you finance it?
Mwiya: Thus far, we've been financing it by doing commercial sales of properties. We sell the subdivisions. We typically do this over extended payment plans, so they don't have to pay cash for the total consideration. Instead, they pay for the land over — between five and 20 years, depending on the individual. We then take about five years to develop each unit.
Mark: Most emerging markets don't have really developed financial sector. Is there a mortgage market? How do you do this? What does the balance of risk look like?
Mwiya: Yeah, there's a mortgage market in Zambia, but it's very small. Also, the cost of credit is pretty high. Interest rates right now, on average, are above 25% per annum. It's just not commercially practical for a person to use a mortgage as a means of financing their home at the moment.
What we've done is dis-intermediate the banks and then provide access to that credit directly to the end-user. We assume the credit risk and the development risk. On the flip side, we've got means of managing that.
Mark: What's your background? What were you doing before building Nkwashi?
Mwiya: Prior to doing this, I was working as a research analyst at a relatively large local pension fund management company. I did that for a couple of years, largely covering economic research, as well as equities.
Mark: How has that skill set carry over to building a city?
Mwiya: There's a lot of quantitative research involved in building out the models. I think this skill set is largely the same. The parameters change in the sense that you have to build all these bills of quantities and understand what the different input costs are and model out expectations for economic performance and how that plays out into your various types of risk management frameworks. I’d probably say that the skill sets flow through.
Mark: How do you attract talent to help develop Nkwashi? Does that talent exist? Do you have to train them? What does that look like?
Mwiya: For the most part, we typically hire locally and then we spend a couple years training people. We have a very low turnover rate. We tend to prefer to stick with people for the long haul. Because with all the skills required to do what we do, people working in formal real estate or finance will have very different expectations as to how to actually build what we're building.
It's one thing to model something out, it's another thing to actually then deal with suppliers and deal with a very dynamic operating environment. Having people start at a relatively junior level and grow into the positions is generally our preference.
Mark: Who is doing the actual physical construction?
Mwiya: We're doing that ourselves. We have a civil works department. Build out all the bulk on our behalf. All the earthworks are done internally, building roads done internally, building the dam was done internally. We outsource certain elements. For example, almost all the design is done externally. We use external engineers to audit our work. We used external urban planners to design the master plan.
Mark: Culture is often talked about as a foundational aspect for a company. Ben Horowitz’s recent book, What You Do Is Who You Are, really drives that point home. How do you think about culture in terms of one, building the team that's executing Nkwashi? Then two, developing the culture for the city itself?
Mwiya: I think one is easier than the other. It's easier to build the culture of the team. Building the culture of the city is a little bit different because you aren't fully in control of who actually buys property from you. You're not going to be screening them to determine whether they have the values that align with yours, whether they have the type of skills that you want the city to be known for. Those are things which are very random. Managing culture within the context of an organization is relatively easier than that. You can filter on the basis of parameters that suit you.
With the city, I think it's a lot harder to do that. However, building institutions that allow for that is the easiest way to do so. Explorer Academy for example, does this. We interview every single student who applies to determine whether they fit and whether they have the values that we want our fellows to be known for. The expectation is that once they go through our program and are then placed into a job, eventually they'll then have to relocate and live at Nkwashi and work from there. That's the way that we can then build out a community that has values that are aligned to our own, and then extending that across various types of disciplines.
We've started with digital design and web development, mobile development and game development. That will eventually be extended to things like civil engineering and architecture and eventually, medicine and such like. We’ll have a wide spectrum of disciplines in which people are practicing their craft, but all share similar values and expectations.
Mark: What are these values and expectations you’re trying to inculcate in the city?
Mwiya: There are values that we use internally and our view is that those values should generally be expressed in society as a whole. Things like relentlessness, openness, dynamism, excellence, adaptability. We want those things to be expressed in how we operate. We want our residents to really be good at whatever it is that they do. We want people to be open minded and to be pragmatic about how they solve problems. We want people to be creative and expressive. We want the whole community to operate at a level of excellence that pound-for-pound competes fairly well with the best in class in the world.
Mark: There isn't that much discussion about it, but cities tend to have their own culture. If you go to Dubai, for example, I've heard people use the term “Mars Shot” unironically. In San Francisco, there’s this general sense of intellectual curiosity and wanting to explore a lot of ideas. In DC, it’s all about politics all the time. I think as you already have mentioned, the company can fire people who don't exemplify those cultures. You can't really force people to move, but there still is a way to seed a culture in a geographic location that exemplifies itself in terms of how think and how people act.
Mwiya: Absolutely. I think institutions are the way that gets done. Institutions and networks. In the case of DC, the federal government and its various departments are all based there. In the case of places like New York, it's the presence of art houses and finance and various types of commerce. In San Francisco, it's the fact that you have such a strong funding network for venture businesses and that requires people to be relatively explorative about the types of things that they want to build. Because ultimately that's what the capital is chasing. Institutions create incentives for this type of behavior development.
Within the context of Africa, building out a culture of excellence requires that you are able to interface with people in the rest of the world known for excellence. Within the context of Explorer Academy and any other institutions we’ll be creating like it, the goal is to enable people to work remotely from Nkwashi and other cities that we build, but for global companies where those types of operating assumptions are taken as a standard. That will help import that type of culture into Nkwashi.
Mark: Why did you choose to focus on information technology as the anchor tenet?
Mwiya: The reason is that right now, technology represents a big segment of overall market cap, of globally listed companies. The top five tech companies are worth over $5 trillion. The top 100 mining companies in the world –
Mark: I think that was probably the case three months ago.
Mwiya: Yeah, for sure. The top 100 mining companies are worth less than $500 billion. Nkwashi in not sitting on a large oil deposit, or a large mineral deposit, so we can't have extractive industries as the anchor. There's not a big enough community to make agriculture the heart of it. Making industrial businesses as the heart of it requires substantially more capital, because you have to build out factories and then attract people there. The national level incentives just aren't there to do so.
Whereas with technology, Zambia is a low-income country, which means wages here and expectations for income are much lower than it would be elsewhere in the world. A mid-level software developer in the US can expect to earn from $60,000 a year to a couple $100,000 a year. In Zambia, that same developer would probably be earning $15,000 to $20,000 a year. If their skills are matched with developers in the US and Europe, the economic incentive for a prospective employer is to hire the cheaper labor unit. We figured that that labor arbitrage is a big incentive for global employers and therefore, the easiest way for us to create a labor market in Nkwashi.
Then the second thing is that because these individuals will be working for global businesses, they wouldn’t be exposed to local economic challenges. It wouldn't matter whether the economy here is booming or it's doing badly. Nkwashi would have its own balance of payments and infrastructure with the rest of the world through this institution. That insulates us pretty significantly.
Then we can also then create robust institutions, like local pension schemes at Nkwashi or venture funds based at Nkwashi. Then we can start to see capital formation happening, largely financed by the labor that we're creating. Then you start creating a financial system as well. The flywheel starts turning.
Mark: We've had this discussion a few times. Why is mercantilism good?
Mwiya: I think mercantilism works for smaller economies, because it's easier for you to attach yourself to a larger economy that sees value in the goods or services you'd be providing. Then in addition to that, to the extent that you have a positive trade balance with same economies, you can create capital really quickly. I think Singapore is probably the best example of this.
Over the last 40 to 50 years they've been able to create something like a half trillion dollars’ worth of surplus capital, largely by positioning themselves as a mercantilist style economy, where exports are a prime focus and the whole economy just built around exporting both services and goods to the rest of the world. If one is to build a small private economy, I think that's the way to do it. Servicing the local economy will be much harder purely because it's more fragile.
Mark: Let’s scale this out then, what does the Zambian economy look like? What are the core industries, what is the short and long term economic outlook, and how does Nkwashi fit into that outlook?
Mwiya: All the fundamentals have been generally strong over the last 20 years. Exports have been growing, labor productivity is on the up, and agricultural productivity has been growing. The numbers have generally looked solid. The big challenge has been over the last seven to eight years, the country's grown its debt stock pretty aggressively. We started off at around under 15% of GDP in 2012. We're sitting at about 95% of GDP right now. There's no more fiscal space for the government.
That's because a lot of this debt is external debt. It is starting to negatively affect the balance of payments and it’s also starting to negatively affect the government's ability to service its own obligations. Payroll and treasury operations have suffered. It’s starting to affect the economy in the sense that aggregate demand is diminished because capacity is being exported right now. The government’s having to spend a lot of its income servicing external debts, so that money which would have otherwise been invested locally is being exported.
Aggregate demand is shrinking and as a consequence of that jobs are starting to be shed and it's creating this negative circular trend. From my point of view, that's not a situation I want to be captive to. If we can build an economy within the broader economy, one that's not dependent on the economic fundamentals of the host country, then we'll be in a position where it doesn't really matter where the boom is taking place with the bust.
Mark: Typically with charter cities, we think a little bit more about manufacturing as the way to export, but Zambia's landlocked so transportation costs are much higher. If you look at the manufacturing bases that are doing well in Africa, it’s Rwanda and Ethiopia, both of which have relatively low labor costs. Zambia’s labor costs aren't super low compared to Africa or East Asia, which I guess gives the more credence to the focus on non-service exports.
Mwiya: That's definitely correct. I think industrial capacity could still be a credible means of building a charter city in Zambia, or other landlocked countries. It's just a question of what's being produced. I think Switzerland would be a good example of the type of industry one would want to create if you're landlocked.
Really high value goods. You don't need high amounts of production volumes to support the industry, because of that very high value. Then also high value services. In the case of Switzerland, that's banking and finance, insurance, commodities trading, and things of that sort. That's the heart of their economy. It's that high value manufacturing, things like watches and mechanisms and such.
Mark: How does Nkwashi interact with the government in terms of getting permits to build or plugging in to the power grid. What is your relationship? What does is it look like?
Mwiya: Generally, we prefer to keep a good relationship with the government. We do all the things that are required of us. As far as things like permitting are concerned, we just follow the normal channels. If we want to build something, we have to submit a notification to our district council, which is the municipal body that covers us. To the extent that the particular thing you want to build or plan for is outside of the scope of the local government, we'll typically then take it straight to the central government through their planning department. It’s straight forward, we just deal as is required.
Mark: How do you think about governance of Nkwashi, ignoring the fact that you might get charter city status. Let's assume that in 10 to 20 years you've got a 100,000 people living there, how do they make decisions about city level resource allocation. What does that look like?
Mwiya: That's a difficult question to answer, partly because we're not at stage where we have to think critically about all of those things just yet, because we're just trying to build infrastructure right now. We have spent some time thinking about the questions and our current answer giving us all scope to actually evolve our thinking is that we would probably go Dubai-style in the sense that it will be much more centralized decision-making.
You want to create enough openness that people have the ability to do whatever they want, but you also want to ensure that whatever values we want people to adhere to are enshrined into the bylaws for the community. Things like strictness around partying, littering, loitering, or design aesthetics for homes, the types of events would be happy to host at Nkwashi, things of that sort. For those, we would be very strict. Outside of those things, we'll just stick with what the law of the land says.
Mark: Assuming you get charter city status, you get a blank slate to create a separate legal jurisdiction. What advantages would that bring you?
Mwiya: I think the biggest advantages would be optimizing our economic infrastructure to allow for further investment into the community. Things which would be important to us are labor mobility, enabling people from anywhere in the world to have a fast-track immigration process. We want to create institutions that allow for adjudication locally. Our working assumption is that we’ll definitely require arbitration, and the arbitration entities would be either local, or where the counter-party wants to port those disputes outside of the country, they'll be ported to a domicile like the UK, where they could then be dealt with.
Mark: Would Augustus build a good charter city?
Mwiya: I think so.
Mwiya: Surprisingly, I think he was a very values-driven decision-maker. He cared a lot about who was in the senate and why. He cared about things like making sure old Roman values were subscribed to by the broader society. There were massive building projects that he did, like aquifers, temples and various other types of infrastructure. I think that suggests that he was trying to create a great society.
The project wasn't just, “I want to rule and get rich.” I think his ambitions went beyond that. He was actually trying to build a civilization. I think for those reasons he would have made a great charter city developer. In a sense, he redeveloped the whole of Rome.
Mark: He came to a city of brick and left it a city of marble. How have your general thoughts on city development evolved since starting Nkwashi?
Mwiya: I think I have a much more healthy understanding of the full scope of what it means to actually build a city. Initially, I think a lot of my focus was on the residential development. Setting up subdivisions and putting my sales targets and my KPIs into development. Now I have a much more thorough understanding of the importance of building up the actual economy, because long-term that's really what makes the place a viable community.
Mark: What about urban planning? Have your thoughts on urban planning changed?
Mwiya: They have in some ways. I think going forward, I’ll prefer to build out much more dense communities than has been the case with Nkwashi, but also understand that that's a function of how much capital one has available to them. If one wants to build highly dense communities, one must have a large enough war chest to actually pursue that. Because you have to build the housing and the apartments upfront. Whereas, that wasn't the case with Nkwashi.
Mark: I think the other challenge is that there's a trend towards density and walkability, but in Africa I think cars are still much more of a status symbol than they are in the US, which might make it more challenging to move to a walkable neighborhood. Just because the middle and upper-middle income families value the car as a status signifier.
Mwiya: Absolutely. I also think that access to jobs is a much more important thing for people. If one can build out an engine that enables them to create new economies from scratch, that would be the first consideration. That's one of the reasons why I think building out the economic engine is way more important than I initially anticipated.
Because most developers expect that third parties will build out those anchors. They'll go out and market to a factory. That means you are beholden to third parties. I think it's a lot easier if a city builder can create their own anchor and port that to wherever the need to build a city, because then they are in control of population agglomeration.
Mark: What city inspires you the most?
Mwiya: Right now, I would say Singapore.
Mwiya: The whole place just feels very rational. It's very clear that every single thing was thought out and done with specific intent that systems work. Yeah, I think it's a masterpiece.
Mark: Sure. It's very well-governed. Ross Douthat has a new book on the decadent society society and I think Singapore could be called decadent. They have extremely low birth rates. The society isn’t really effectively reproducing itself. While it functions very well, it doesn't have a level of excitement. I've never really thought “I want to live in Singapore.”
Mwiya: That's true. I think some of those things can be solved. I think the birth rate, if the appropriate incentives were created earlier on, could have been solved for. As far as culture is concerned, I think creating institutions that can facilitate cultural formation through things like the arts should've been a greater priority. Again, those are the type of things that would take several decades to successfully build out.
The other thing is that Singapore is a multi-ethnic community. How does one build out artistic expression when they're at the junction of Indo culture and Sinic culture? It's a little bit difficult for them to be all things to all people. It's also one city, right? If it was big enough, maybe it could have justified the formation of an internal artistic community, like Hollywood, but it's just too small.
Mark: What are the binding constraints on Zambian development, as well as African development more generally?
Mwiya: I think the biggest one is access to capital. That's definitely the most material binding constraint. The second one will be access to talent. I think that's those two things. Then the third one is just purchasing power.
Mark: Why not governance?
Mwiya: I think governance can be dealt with. Most governments want development to happen. I think to the extent that a developer can start showing success, accommodations can be made to create a well-governed city. I think governance is much more solvable. Whereas access to capital is a much more tricky problem to solve, as local capital markets tend to be thin. You also have to deal with the local currency, which because there’s not enough productivity in the economy, will have higher costs of saved capital. If you borrow or raise from outside of the country, you now have foreign exchange risk to deal with and you have to guarantee a rate of return to your investor, whilst generally making most of your money in local currency. That's quite difficult. That's one of the reasons why we like the idea of building out this mercantilist-style economy and that we can actually then create a source of cash flows that aren't local, which helps manage those risks.
Mark: Sure. I want to push back and add a little more. In 1960, the per capita income of Ghana was higher than in South Korea. South Korea still managed to develop. Additionally, you have a lot of African countries that aren't exactly capital constrained. There's a lot of natural resource wealth. It's just effectively siphoned off.
Regarding your point on talents, for example, Nigeria has a bunch of talent, but part of the reason Nigerian universities are poor is because the army effectively neutered them in the 70s and 80s because they were protesting against the military dictatorship. The army intentionally made the universities less effective. What’s your response to that?
Mwiya: No, I agree. Those are macro-level headwinds that one has to deal with. You're right in that I think African countries are resource rich, but access to capital is still really important. You can have a bunch of resource wealth in the ground, but if you don't have the money to develop the mine, if you don't have the skills to build up the mine, there's nothing you can do but sell the mine and the rights to develop it to external parties. Then they're incentivized to reduce their local tax rates, so they'll definitely rip you off.
Government trying to build out local industrial capacity by having a strong state-owned enterprise, a centralized economy, was the case with many African countries in 60s and 70s. The challenge there is this human capacity. You have a lot of people working on these things in the first generation. Their mental models for efficiency and for wealth accumulation are all very new.
It's very difficult for them to actually make these things maximally productive. There's a lot of waste. Between 1970 and 1999, Zambia's copper production fell. It was about 800,000 metric tons per year in 1970. By 1999, I believe it was about 250,000 metric tons being dug up and exported. That's a very material drop. The reason behind the drop was largely mismanagement of the assets. There were no new mines being developed. There was no new investment into ensuring that the capital expenditure was being replaced on time, and so the capacity to produce diminished.
The country had literally no one else to blame but itself for that. The human capacity just wasn't there to operate those things at the time. In a sense, it's a multi-faceted problem. You have to solve all these things at the same time. And you just have to be somewhat patient. I think building out economies isn't something that happens in a decade for most people. I think it's a game of centuries. Singapore and South Korea are outliers. Most of the world just hasn't developed that way.
Mark: I think the question of capacity building is an important one. This is a question that frequently comes up in terms of special economic zones. How do you actually develop skill sharing to ensure that it's not a bunch of Westerners who come in and operate them and then the locals have low skill jobs providing services, but don't actually gain the long-term skills necessary to take over and export and source their own businesses as well?
Mwiya: I think those are very fair considerations. Speaking to your point about Nigeria, part of the challenge that we have in Africa is that our countries are all very new. For the most part, they are an amalgam of ethnicities which had nothing to do with each other for the earlier years. Many of which didn't even like each other. They're now forced to coexist within borders that they didn't draw and also now forced to build out all these institutions.
Politics has to take all those things into consideration. Additionally, you then have a group of rent seekers who emerge with the systems who don't want to share power. They take the position that if they enable local business houses to be enriched, they're enabling new king makers to emerge, and so it doesn't serve them to allow these cabals to be created. So they prefer to reduce local capacity, hence the under investment in universities that you spoke to.
Hence, the reason why many government contracts across Africa are typically awarded to foreign companies. A government would prefer to deal with a Chinese state company than a local business house because the Chinese state company has got no political equity. They're just here to do their job and leave. Whereas giving the contract to a large local firm may result in capital accumulation and therefore, power transfer. They don't want that.
Mark: It’s a big political question. You're seeing that a little bit right now in the US over the last several years, where the Bay Area and California have become increasingly wealthy and powerful and are beginning to demand something of a political voice. Their reaction from the East Coast, the Acela Corridor, has generally been very harsh and you've seen, what I perceive to be unfair, attacks on tech.
This isn't really the East Coast, but Josh Hawley critiques tech, saying “Why haven't you gone to moon with this?” Sort of like Peter Thiel, “you promised flying cars and you gave us 140 characters.” At least tech has given 140 characters. The rest of the country is still stuck in production modes from 50 years ago.
Mwiya: Yeah, that's exactly right. I know the pushback is entrenched parties trying to secure their positions. The media had a very powerful position in helping select and guide. Political candidates would become leaders eventually or shape their political narratives through stories. All of those privileged relationships and the power is now threatened by tech firms who have significantly more reach and more financial resources than traditional media houses ever had. A lot of this pushback is really just a function of people trying to secure their position.
It speaks to exactly to the same type of problem that we've seen in Africa. Hence, my saying that building up great communities is something that typically happens over centuries. Yes, South Korea, Israel, Taiwan, and others have done it in record time, but those are exceptions. I don't think that's the norm.
Mark: Most of Europe had incomes around $2,000 per year in 1800. It's been two centuries. If you look at the history, you can trace back the developments that set the stage for the Industrial Revolution back several more centuries. I wanted to touch a little bit more on the Silicon Valley point, because you’ve spent a decent a bit of time out there. What do you think Silicon Valley understands about city building and then what do you think that they still don't fully appreciate?
Mwiya: I think Silicon Valley is good at making markets, they understand really well how to build out economies and how to do so rapidly. What Silicon Valley doesn't understand as well is real estate, building out brick-and-mortar. It's a function of business models. Silicon Valley typically prefers businesses that can grow really, really rapidly and can have very low marginal unit costs and high margins. Real estate generally doesn't work that way, at least traditional real estate doesn’t.
City building is relatively new-ish within the context of doing it for profit. Because of that, I think that the appreciation of the fact that marginal unit cost in city building can actually be reasonably low and profit margins can be reasonably high, that doesn't translate as well. Purely because people are used to working with bits versus earth.
Mark: I think that’s an astute observation. That's one thing that we've increasingly been thinking about in our office, what does it mean to do real estate versus building a city? Because if you’re actually developing a city; the additional unit cost of a resident is effectively zero How much was the additional unit cost in New York of additional person moving there?
There's some private cost that is associated with the apartment in which they live, but the public infrastructure is all there and unless you’re at peak carrying capacity, it doesn't make a difference. There's an additional cost in the burden on the courts and police, but it's extremely marginal.
This is the challenge that surrounds us all, but how do you change the dynamic away from building out 20 square feet for somebody to work in a co-working space, where that space has a defined input cost and a defined amount that you can sell the space for at low margins? Compare this to having very high upfront investment costs to build out infrastructure. After this infrastructure is built out, you still have maintenance costs, but that additional marginal unit of somebody going to use that infrastructure is actually quite low.
Mwiya: I think it's a function of being able to see through the financial model and identify all the different levers that generate income and understand how each lever works. Some of the levers are less profitable than others. An example of that is during the land development. You can buy reasonably low-cost land, let's call it $2,000 an acre, develop it, and then sell it for upwards of $50,000 an acre. The marginal difference there of the land cost is pretty high. Then you also have to take into consideration the cost of making that development, which would easily be about $25,000.
Your real gross profit margin is about 50%. You might make relatively stable and moderately high margins on that, but then you also have to then consider your other utility costs, the cost of servicing those utilities. Because of plain-vanilla infrastructure, you're not looking for really high margins. You’re looking for stable income with moderate margins and a lot of growth potential into perpetuity.
Then you also have other things like market making, creating a labor market and being able to tax that. That's a really high margin business and it doesn't require all physical infrastructure being built. That would be a really high source of internal rates of return, like a great source of IRR for the overall development. In the medium to long-term, that becomes the single largest source of both revenue and returns.
It speaks to the nature of what a city is, which is a marketplace. It's a marketplace where you're just solving for housing, labor, jobs, access to opportunity. The ability to tax every single action that takes place within that community presents a really great source of value. I think that's a point that's often missed.
Mark: Africa’s supposed to have over 900 million new urban residents by 2050. How does that change Africa?
Mwiya: Well, provided the continent continues growing at sub 7%, I think it's going to create a lot of social pressure. A little bit of joblessness. There’ll be a lot of overall higher geopolitical risks and tension, but also a lot of opportunity for people to build out goods and services that people want, so there will be a lot of wealth created. It'll be a very unequal community, but it will be one with a lot of promise. What the continent really needs to do is get to a stage where it's growing in double digits for at least 40 years. Thus far, it's failed to do so.
Mark: You have spoken on the need for the jobs and investment. Specifically, what does it need to do? If you are, for example, king of Africa, what changes do you make to get to 7%+ GDP growth? If you're unsuccessful, then what do those increasing social pressures look like?
Mwiya: Because it’s a continent, you're dealing with pretty diverse range of contexts. You've got mountain kingdoms, like Swaziland and Lesotho. Then you also have places like Ghana and Nigeria which have access to the sea. There’re loads of different answers. I think one of the things that needs to happen in Africa is that there has to be a lot more top-level coordination amongst the countries, as well as a lot more local government involvement in building out the economies. Because the local government knows what the challenges are much better than the very top-level officials typically do.
The ability to solve these problems is often neutered because they lack resources. In addition to that, what often happens is that rural communities, where a lot of the value often sits, are often governed by people whose training and capacity is very questionable. That's because there’s a lot of brain drain.
People often talk about brain drain within a context of people living one country to go elsewhere. It happens within countries as well. A guy who was born in a rural area doesn't want to live there his whole life. He has to go to a big city, and so that leaves lower capacity people to deal with the problems of those places. There's just no incentive for people living in the city to actually solve for those problems, because they're busy with their own lives.
There has to be a lot more intentional investment into human capacity in these rural places, where people understand that opportunities can be developed to solve all those problems. There also has to be top-level coordination. A lot of African countries are really small, in the sense that the economies aren't particularly large. Zambia is a $30 billion economy. Ethiopia is $100 billion. Egypt isn’t very large either. Nigeria, with almost 200 million people, is a $400 billion economy. At $400 billion, that's about Houston or Miami in the US and they have significantly smaller populations.
Solving for Africa's problems requires a lot more continental integration to create common markets. Some of the infrastructure for that has been built. There's a continental free trade agreement that was enacted last year. We also need fewer stock exchanges, just one or two very large ones that everybody can plug into. A common regime for securities registration and trading, taxes, and laws.
Creating a single polity is what needs to happen. That could be done through law and it can be done through finance; financial institutions being aligned to that vision. Then the third part, I think, is the creation of an African infrastructure, including pipelines, railways, roads, things of that sort. Some of this doesn't necessarily always have to be built. Some countries just don't need a railway built between the two of them, because the geography just doesn't support it. Where it's rational to build up that infrastructure, it certainly should. A problem that's happening now is that every country's too focused on its own local problems and that prevents the synergies from forming.
Mark: Is China helping?
Mwiya: In some ways, yes. A lot more infrastructure has been built. Oftentimes this infrastructure is rationalized for the local needs, so there's no integration. As an example, South Africa has its own railway system. Zimbabwe has its own railway system. Zambia has its own railway system. Back in the 1800s, Cecil Rhodes wanted to build a Cape to Cairo system, but there's been no investment in that vision since the colonial administrations left.
It absolutely makes sense for those railway systems to be integrated. China isn't necessarily pursuing that vision because it's not in its direct interest to do. That's something that African countries should be dealing with. I think China has built out infrastructure in places where it has a strategic interest to do so. Kenya being one.
Mark: Do you expect to see a blowback against Belt and Road?
Mwiya: No, I don't think so. Largely because China’s approach to politics is very impartial. They don't really care who's in charge. They don't really interfere much. For the most part, the infrastructure is wanted. It's typically well received. Historically, Chinese investments have faced a lot of blowback for things like labor policies.
Mark: There's talk about this new scramble for Africa. The US redesigned OPEC as the Development Finance Corporation with double the budget. Turkey, Russia, everybody is hosting Africa summits these days.
Mwiya: Overall it's good because it shows that there's a desire to engage with the continent. It is also unlocking access to capital for a lot of business people and projects. Overall, it helps facilitate broad-based economic growth. The thing that's missing is an original agenda for the continent. The continent doesn't have its own foreign policy. It doesn't have its own domestic policy, because it’s all very decentralized. That's not really helpful because the nature of the problems that we’ll be facing are international.
If the Sahel becomes even more desert, that affects countries that neighbor those countries. If rainfall patterns in Kenya change and there's a lot more desert growing there, eventually nomadic farmers in Kenya will start migrating into Tanzania and Uganda and that starts creating problems for those countries. Being much more alive to the fact that coordination is important is something I would like to see.
Mark: Are you optimistic that that coordination will happen?
Mwiya: I think maybe in the next generation it could happen. Right now, no.
Mark: I guess for the last question, what is the Mwiya production function like? How do you work? How do you make sure you're getting the most out of yourself?
Mwiya: That’s a good question. I don't really very normal working hours. I work when everybody else is working in office, typically 9:00 to 5:00. I’ll often then take my work home with me. I'll do another two or three hours there. I generally don't distinguish between weekdays and weekends, so I’ll work through the weekend as well.
Mark: I bet your wife loves that.
Mwiya: She's not really a fan. I generally try to keep Sundays as a family day. How I work typically doesn't actually follow a pre-programmed set of activities. If I'm in cerebral mode, because I have to do a lot of thinking, I'll probably do a lot of walking and isolate myself, because I just want mental clarity. Sometimes I don't really do a lot of typing or engaging with the work. I'll just be thinking. Then sometimes, I'm really busy modeling things out, or writing on-site, inspecting stuff. It just really just depends on the immediate needs, and so broader strategic priorities.
Mark: Thanks for coming on the show.
Mwiya: Thanks a lot for having me.
Mark: Thank you for listening to the Charter Cities Podcast. For more information about this episode and our guest, to subscribe to the show, or to connect with the Charter Cities Institute, please visit chartercitiesinstitute.org. Follow us on social media @CCIdotCity on Twitter and Charter Cities Institute on Facebook. I'm your host, Mark Lutter and thank you for listening to the Charter Cities Podcast.
Links Mentioned in Today’s Episode: