Experimenting with Private Governance: Evidence from India, China, and Honduras
Gurgaon, India, Jiaolong, China, and Próspera, Honduras offer three models of private governance.
Experiments with alternative governance are becoming more common all over the world. The spread of SEZs from a select few cities in China to the entire nation and then the world at large has made nations much more comfortable with special jurisdictions and some forms of private governance. Simultaneously, the Honduran ZEDE program is taking private governance further than ever, and many nations are watching closely to see if their experiment produces results. As private governance spreads around the world, it will change as each culture, economy, and government molds it into a form best suited for their circumstance. By studying the best aspects of each of these mutations, we can build a better understanding of private governance.
Gurgaon, India: Growth Without Governance
Gurgaon is a private city that didn't want to be a private city. It didn't start out as a special economic zone or a real estate development and it doesn't have a unifying constitution or charter that lays out the rules of the game. Instead, a combination of inability and neglect from local bureaucracy has left private developers to support the rapid pace of economic growth in Gurgaon. Although Gurgaon's private infrastructure is better than the average Indian city, without sufficient market design, classic public goods problems produce widespread inefficiencies.
In post independence India, transferring land rights or changing land use was a complicated and expensive procedure that required bribing several levels of government officials and navigating mountains of bureaucracy. In the flurry of government reform that took place in India over the 20th century, the marginal land of Gurgaon somehow came under the direct authority of the state of Haryana, without intervening interests from a city government or tribal council. Haryana happened to also be one of the better run and more liberal state governments. After some lubricating urban development laws were passed in the 1970s, development rights could now be exchanged with the approval of only a single authority, and a favorable one at that. Gurgaon's location just outside of New Delhi (and fifteen kilometers from Indira Ghandi International Airport) and the ease of development there compared to most of India led to explosive economic growth. Gurgaon is now a booming industrial center that houses branches from over half of the Fortune 500 companies. In the 1970s, Gurgaon was agricultural wasteland. Today, Gurgaon has forty-three shopping malls, many luxury-apartment towers, gleaming skyscrapers, seven golf courses, and at least half a dozen large five-star hotels.
Underneath this gilded exterior, however, Gurgaon faces acute challenges in the under-provision of public goods and exploitation of the commons. Only one-third of the city is connected to an official sewer line. Many large business parks and residential developments invest in scale-inefficient private sewage treatment, but even more simply dump sewage in unallotted common areas, or are left to wallow in their own waste. Similarly, water service is poor, so 70% of Gurgaon residents tap into groundwater through private wells, or ship water in in tanks. Without any volumetric property rights, residents of the city are free to drain groundwater much faster than it is replenished by rain. The city faces parallel problems and private solutions in the provision of electricity, security, and transportation infrastructure.
These are serious problems, but it is important to keep the base rates of these issues for India in mind. 4,861 out of the 5,161 cities and towns in India do not have even a partial sewage network, half of India’s cities have no piped water supply system, and power outages are common if people have access to electricity at all. Compared to the average government provision of public goods, Gurgaon's private system is demonstrably better. Within some large landholdings that have extensive private infrastructure, the quality and price of public goods is better than almost anywhere else in India.
It is in the interactions between these private entities where things break down. Gurgaon had no [forward looking urban plan or city charter](https://en.wikipedia.org/wiki/Commissioners'_Plan_of_1811) to guide profit-seeking action into useful cooperation and mold development around future infrastructure. Combined with its rapid growth, governance was forced to come after development. This order of operations greatly increases transactions costs for large scale infrastructure projects that span many property lines. Certainly, much more could be done by the government to decrease transaction costs for buying and selling land and approving large infrastructure projects, but even with an ideal bureaucracy it is far more expensive to build highways and water lines through an already existing city.
Gurgaon faces many unresolved challenges, but its development is a good sign for the potential of private governance. Despite wholly inadequate government services, voluntary interaction was still able to coalesce into an economically productive, rapidly growing, and comparatively well-serviced city. Within large landholdings of single firms the results are even better. Profit maximizing firms looking to increase the value of their land have built all of the public goods we are told that they can't build, and with higher quality than government competitors. If this is what an unplanned, misgoverned, public-private hodge-podge city can do in 50 years, imagine what is possible for a private city with property holdings large enough to internalize externalities, a forward looking urban plan that lays out future growth-accommodating infrastructure, and a governance charter that all citizens opt in to. Gurgaon shows us the power of private cities, even when they make a lot of mistakes.
Jiaolong, China: Business as a Civil Service Exam
Jiaolong is a small, industrial suburb-city of Chengdu in Sichuan Province in western China. It has a population of over 100,000 people and it is built, owned, and operated by a private company eponymously named Jiaolong Co. Yujiao Huang, the owner of Jiaolong Co., had experience running other industrial parks in China, but Jiaolong is more than just another industrial park. The contract he made with the county government in Shuangliu includes tax sharing provisions, transfers land use and planning rights to Jiaolong Co., and requires the company to invest billions into residential infrastructure. Jiaolong Co. is not a political organization, however, and the city doesn't make its own legislation. It is more like a private government contractor who is paid by the local government to facilitate and organize rapid urbanization in the area. Although Jiaolong is not a platform for ambitious political reform, it highlights the effectiveness of selecting and motivating the providers of government services through market competition and the profit motive.
With a population of around 100,000 people, Jiaolong is relatively small compared to the hundreds of Chinese cities with millions of residents. The park has an area of 4.36 km², with factory area as nearly half of that total, and a residential area of .5 km². Jiaolong is, however, denser and more productive per capita than the average Chinese city. By the end of 2014, Jiaolong achieved an annual GDP of $3 billion USD and the company brought in an annual tax income of seventy million. The population density is 25,000 per km², much higher than the average density for Shuangliu County, which is only 7,000 per km². Compared to most other cities in China, it has achieved a higher GDP and density per square meter. As of December 2014, Shuangliu Jiaolong Industrial Park accommodated 1096 business firms, 580 in manufacturing, 499 in distributions and services, 7 in the financial industry, and 8 in education and training. Jiaolong Co. has spent more than $600 million in infrastructure investment. The total investment from the company and the local government, including funding for a shopping mall, an aquarium, office buildings, hotels, and commercial housing, has been more than $1 billion. Jiaolong Co. has also set up more than 30 overseas offices to invite business investors from abroad.
Like all private enterprise in China, Jiaolong Co. is closely connected with the government. Yujiao Huang serves on the Chengdu People's Congress and several other industry associations, and has been awarded the title of "Excellent socialism with Chinese characteristics Constructor in Chengdu". This means you won't see any radical civil rights legislation or tax cuts in Jiaolong. This has not prevented Jiaolong Co.'s private bureaucracy from improving quality of life for thousands of people, however. Within 10 years, on four square kilometers of collective-owned farmland, Jiaolong Co. transformed subsistence farmland into a manufacturing park, and further into a commercial and service sector city. The company has invested in a state-of-the-art water purification and sewage recycling center for the city, with 30,000 tons of daily treating capacity. This huge facility took only 8 months from conception to the beginning of operation. The company also owns and operates a free 9-year school for the 1600 children of residents and workers. There are public cultural centers, museums, and exhibition venues. Jiaolong looks like many other modern Chinese cities, and the company performs the same services that are done by local governments all around the country. Jiaolong is unique in that it is a first and successful experiment with governments contracting private companies to provide public goods.
Jiaolong Co. has been so successful in providing public goods because its leaders have been selected for their logistical and organizational merit, and the actions of those leaders are constrained and motivated by profit. Yujiao Huang was selected to build Jiaolong because he had proven success in developing industrial parks in the past. He was able to build infrastructure and voluntarily attract businesses to his parks, even when faced with intense competition, and has become a notable business leader because of it. The government bureaucrat in Shuangliu county, who might have had Huang's job if they hadn't agreed to the contract, wouldn't have the same experience nor would they face the same costs of failure. China has a long history of meritocratic civil service, and the Shuangliu government knows that the best way to test the organizational skills of potential bureaucrats is with the crucible of market competition. After being selected for the job, Huang still had to avoid too much rent seeking and complacency. When Jiaolong started in 2004, it was just marginal farmland. Millions of migrant workers in China move from farmlands to cities each year, and he had to convince some of them to come to Jiaolong over Chengdu, or Beijing, or Shanghai. He was motivated to do this by the tax sharing agreement with the county government. The more populous and productive he made Jiaolong, the more money went into his pocket. Importantly, Huang didn't have much direct control over the tax rates; he couldn't just raise taxes and make more money. He had to increase the tax base, i.e the income of Jiaolong, if we wanted more profit. Jiaolong has been a well run city because the market for new industrial parks and cities in China is very active with a constant stream of new entrants. Winning customers in this competitive market is a continuous civil service exam.
Próspera, Honduras: Governance Without Growth
Próspera is a part of Honduras's ZEDE project, and it is the most conceptually faithful to the original libertarian idea of a private city. Próspera and other ZEDEs have significant autonomy, not only economically, but also politically. A private company will set and collect taxes, provide public goods, and organize urban development like the other examples we've seen, but Próspera will also be able to make legislation concerning medical treatment, arbitration, education, and more. According to their website "The governance institutions of Próspera have been carefully crafted to protect the environment, uphold human rights, and give entrepreneurs and enterprises the freedom and structure they need to grow profitably and sustainably in partnership with the people of Honduras."
This framework of political autonomy and economic reform makes Próspera easily the most ambitious private city project on this list. It is also the furthest from being realized. Currently, Próspera is no more than a few houses on a remote tropical island off the coast of Honduras. They have some large institutional investors like Zaha Hadid and Dubai International, but the project is still in early days. Additionally, Próspera's small size will make it difficult to be a globally influential city. Currently, the company holds only 58 acres of land on the island of Roatán . If all of their planned land acquisitions go through, this could grow to 1,000 acres. This is still tiny, at only 5% the land area of Manhattan. It's possible that as Próspera grows, it will buy more and more of the land on Roatán, but that sort of growth seems a long way off. Próspera has laid out governance institutions and property rights for decades in advance unlike Gurgaon, and it has ambitious reforms to economic and civil rights regulation unlike Jiaolong. Also unlike those other two cities, however, Próspera has almost no residents and has not yet started growing quickly.
Próspera's greatest potential, and greatest risk, is as a proof of concept for more libertarian private cities around the world. If Honduras can get a modern, productive city on an otherwise under-developed island just by allowing someone else to build it, many other nations will take notice. If, however, Próspera suffers through one too many public relations disasters, causes another constitutional crisis in Honduras, or just fades into history without making much of an impact, it will be much harder to convince other nations to try more ambitious private city projects.
While many people dismiss the unrealized ideal of private and competitive governance as a pipe dream, parts of the idea continue to be tested and developed in experiments around the world. None of these experiments have yet achieved the level of influence or reform imagined in the original formulations of the idea, but they each prove the viability of aspects of private governance. Gurgaon shows that even imperfect markets can exceed government provision of public goods. There are clearly inefficiencies in Gurgaon's private provision of public goods, but India's rapid urbanization would test the organizational capacity of any institution, and the state has not risen to the challenge. Jiaolong is another example of China's powerful syncretism between the state and the market. The government is committed to promoting and organizing economic growth through urbanization, and it is discovering that profit-motivated and market-tested business leaders make the best bureaucrats. Finally, Próspera is pushing the frontier of private governance. The company is explicitly trying to construct the world's best institutions, but only time will tell if they will last and outcompete global incumbents. Regardless of dismissive critics, private governance will only become more effective and more common as we learn from the successes and challenges of the experiments happening all over the world.