I was thrilled to get a chance to talk about cities with Alain Bertaud - he has been one of the most important thinkers in urban planning for the past fifty years. His book Order Without Design is a must-read and an excellent summary of his research (conducted in collaboration with his wife Marie-Agnes, an urban planning scholar in her own right) project with aim of bridging the gap between urban planning and urban economics. Alain is a brilliant and generous teacher who has greatly influenced me - I hope my questions have done their bit to honour him.
Transcript
Tobi;
Welcome to Ideas Untrapped podcast and my guest today is legendary urban planner, Alain Bertaud, welcome to the show, sir, it's an honour to speak to you.
Alain;
Thank you very much for inviting me, I'm quite honoured.
Tobi;
You are aware that some of the biggest cities into the future are going to be in the so-called low-income countries, because urbanization is exploding in cities like Lagos, Kinshasa, and these cities are a bit different from some of the cities in other places around the world, especially in the West, you know, in that they are lower-income, they are a bit congested, they don't have much density, and, it's a challenge for such cities having to host that many people. Now, if I may ask you, what would you say the problem has been in making some of these cities work? Are we seeing a failure of markets or planning or a bit of both?
Alain;
I think that there are sometimes market failures. But I think that there has been a neglect of infrastructure. For me, a city, and that's something common to all the cities of the world, whether they are, you know, in Europe, in America, in Africa, or Asia, the main things for cities are labour markets, that's why people go to cities to find a job. And that is why a big firm will go to Lagos. They will go to Lagos, rather than a small town somewhere. They will go to Lagos because they will find in Lagos people who are competent in whatever they want to do. They will find a large labour force, you will have a lot of choices. And so if I am a migrant living in a small village somewhere in Africa, and not necessarily Nigeria, I may want to go to Lagos because I know there are a lot of jobs there. So if we accept that a city is a labour market, the most important things are two things.
First is transport. You should be able to move in this large city. Within an hour, you should be able, ideally, to go from one side to another side, in order to find the job you want and change jobs. You know, changing job also is very important. That's why company town, you know… sometimes you have a mining town or a town developed around a steel mill or something, and then everybody there is working for one employer - the mine or the steel mill, this is not very good, because you have no chance of changing jobs. I think the advantage of very large cities like Lagos or Abidjan or Dakar, is that there are so many employers that you can fill your way, you know, you can change jobs and learn things from other people, that's what's a city.
Now, what should the planning be? Planning should be transport, you know, there should be a system of transport. And when I say transport, I don't mean necessarily a subway, I mean, subway sometimes is necessary, but not always. It could be informal transport, you know, the different minibuses, for instance, so things like that which are private. But the planners often consider them as a nuisance, you know, that they are a little messy, they stop everywhere. Sometimes they don't follow the rules very much. But if they are there, it's because there are people who prefer to take this informal thing rather than a regular bus. So we have to take them into account. And we have to make them more efficient, you know, by having specific stops where they can stop which is wide enough and things like that rather than eliminating them.
So the first thing is transport. The goal is to allow people to move from one part of the city to another in less than one hour. Now, in a very large city like Lagos, I suppose it's a bit like Mexico City, you will find that this is impossible right now [to move] from one side of the city to [the other], you know, let's say you go from north to south, it may take you three hours to go there. The goal is to decrease this time, you know, [and] how do you decrease this time so that you can have access? Any individual should have access to the maximum number of jobs. And it's the same for the employer. You know, the employer, when they look for employees, if they move to Lagos, suddenly they need somebody with specialized, I don't know, a welder, for instance, somebody who is very specialized in something. They want to have a choice between competent people. If the transport system works well, they will have a choice between 100 welders and they will select what is best for their company. So transport is the most important thing and you have to take into account informal transport, you know, this is very important. You cannot just say the best will be to have a subway or... you know, it's possible that the subways might be necessary but it's only one part of the transport system. You cannot pretend that one day everybody will move by subway, or municipal buses, or even ferries or things like that.
All these modes of transport have to be combined and thought together, including cars, by the way. Many of my colleagues now are dreaming of cities without cars, I don't think it can work because first you have freight, and you have certain jobs which cannot be done without a car, you know, if you are a plumber, or if you are an electrician, you have to move around with your material, you cannot take a subway… if you are a plumber, you know, with your bathtub or something like that. So a large city has acquired a lot of freight, you know, you have restaurants, you have bars, you need to bring food to those restaurants, to [bring] bottles of beers, something like that. So you need a transport system which accommodates all modes of transport. Some of my colleagues have a preferred means of transport that they love, you know, say light train, tramway, or bicycle, or scooters, or whatever, or subway, or monorail. And I think that it's possible that a monorail is a good thing, but it will be only a small component, you know.
So the job of the planner is to accommodate all these different modes of transport. And if people prefer to take even a taxi motorcycle for instance, which I think in many countries of Africa, I'm sure in Lagos it exists too, you have to accept that this is the best way for some people, not everybody, but for some people. So you have to also accommodate that and say, Well, what do we do for them to reduce, for instance, reduce the pollution they cause but also reduce accident, make them more convenient, because those means of transport are serving certain groups of people who have no choice, who cannot afford it, or who live in a part of the city which is not served by the normal transport.
So transport is very important and transport has to be multimodal, and you have to look at it. The other thing which is very important in every city is housing. People move to the city from the countryside or from another city, and they look for a job, but they have to find housing. And very often, I think [for] many of the cities in Africa, but also in Asia, or even in Europe, they didn't welcome the migrants, they considered that the migrants are a nuisance, you know, because usually, they are relatively poor. Some of them are coming from the countryside, so they do not have the skills. You know, they have skills, but they are raw skills, which are not necessarily very useful in the city. So they have to learn skills. The city has to welcome those people because they are the labour force of the future. They are the ones who are going to pay taxes in the future. You cannot import only people who have PhDs or things like that, I mean, those are very useful, too.
But we have seen that during the pandemic. During the pandemic suddenly I remember in New York, but everywhere else, people were saying indispensable people, who are the indispensable people? And we found that the indispensable people were not professors like me, they were people who were delivering food in grocery stores, they were indispensable. They are indispensable for the life of the city. So that's why they have to be welcome too, you know, and for that they need housing. So they need housing, they need land. I think that the big mistake that many cities have done, again, everywhere in Europe, as well as in Asia, or in South Africa, by the way, is to concentrate too much on housing, and not enough on infrastructure.
I think what planners need to do is to let people build whatever they want even if it's a shack, but provide clean water supply, provide sewers, and some services like health [centres] and schools, and let people build whatever they want on the lot, even on the very small lot. In my book, I have an example in Indonesia what they call the Kampung development which were villages which were absorbed by the city, and you know, if they were very poor, they will have a lot which is only 15 square meters, and they will build a house of 10 square meters with corrugated iron and bamboo and then that's it. This is okay, providing they have clean water supply and that the dirty water is evacuated. What is terrible is to live in an area where the garbage accumulates, children play in dirty water and there are no health facilities at all or schools.
So, to me, the criterion of a successful city is how long do they take to absorb a migrant, a migrant who is coming from the rural area, who has no skills, he has only his arms or her arms. And how long does it take to absorb them so that they can get an urban job where they are very productive for the city and then contribute to the welfare of the city. So some cities have tried to measure it a bit informally and some cities take one or two generations. You have one or two generations of migrants living in extreme poverty, very often being sick because they live in very unhealthy neighbourhoods, and it takes two generations to be absorbed. In other cities, in some cities of Asia that I know, in half a generation, those people are absorbed. So for me, how quickly you can absorb these people in the city life is a sign of success that you can measure. Now, the attitude very often of the housing board or people in government involved in housing, is to say, well, these are poor people, let us be nice to them and build really nice houses for them. So they build kind of a walk-up apartment, or five, six-storey or something like that. And the problem with that is sometimes they are well designed, most of the time badly designed. But when they are well designed, they are too expensive. So the government, instead of delivering one million lot a year to absorb those migrants, they deliver 500 houses. So the houses are nice, you know, they have electricity, they have plumbing, but 500 houses do not solve any problem at all for all the others.
So I think that you have to give up the idea of building houses. And this is not very popular, by the way. Politicians like to say, we are going to have one... usually, they say 1 million houses, and then they end up building on the 5000. And they call the press, they build a simple building and they say, you see everybody in the city now is going to be entitled to a house like that, and then never get built. And then we are back to square one. So I think we have to be very realistic, we have to accept poverty, we have to accept that there is a lot of difference in income in a city and we have to concentrate the resources of the government on the few things which are important, like water supply, sewer and things like that. Not, you know, not having an ideal city.
And poverty is something which is temporary. For instance, I used to work in Korea, a long time ago, you know, Korea, in 1968-70 I think had about the GDP of Mali, you know, it has about the same and then what happened? And suddenly now it's an industrialized country. They absorbed migrants very intelligently, I think the absorbed migrants and the area which were slums are well developed, you know, you still have neighbourhoods which were former slums which have been developed. So you see, poverty is a temporary phenomenon. It's not a permanent one. And you have to accept it when it happens. But then slowly make the people employed, so slowly, they will emerge from poverty. You don't address the problem of poverty by giving say somebody who has an income of, let's say, $300 a year to give this person a house, which costs you know, $50,000 is not going to solve poverty because you will not give very many houses like that to them. And probably those houses are going to go to people of much higher income very soon. So you see where infrastructure is always useful for everybody. So that's my attitude, those two things. First, the people who live in the city are the ones who are going to make this city so the infrastructure has to serve this. And the infrastructure, in particular the roads, has to give access to a lot of land even if the cities sprawl, so that everybody has access to a piece of land where they can build something. If originally they build a shack which is not very nice,[it] doesn't matter providing they have an infrastructure which allows them to stay healthy, and to have access to jobs eventually. So then they will themselves either move to another neighbourhood or build something which is better. Again, I think my chapter on the Kampung in Indonesia in my book illustrates this very well.
Tobi;
I'm going to come back to cities as labour markets later, which is one of the most powerful insights I got from your book. So we're talking about housing. For example, in Nigeria, it is popularly reported that we have a housing deficit of 17 million households, there are many independent estimates that put the number higher than that. So how do we, especially, in the face of rapidly increasing urbanization… how do we increase urban housing at a big enough scale? Do we have to democratize land markets in some of these cities? For example, in Nigeria, we have a Land Use Act that places the ownership of land solely in the hands of government, though there is an informal land market but it's, of course, largely informal. So do we have to democratize ownership? And would you say the ideas of Hernando de Soto will be useful here, like, we need to absorb more people into the formal land registry?
Alain;
Right, yeah, I like your idea of democratizing the land market. That's exactly what you have to do. Now how do you do that? I will give you an example. In Indonesia where I worked again, when the government started investing in the Kampungs, which were slums at the time, you know, pretty bad slumps, actually, but providing the infrastructure in those slums, you know, I was working for the World Bank at the time. And we insisted that they should survey this informal area, and give tenure to everybody, even people who had only say 10 square meters of land. And then the Indonesian told us, that will cost a lot of money, it will be very, very long to do because, you know, all the streets are crooked and things like that it's very difficult to survey. And they say, why don't we just accept the informal market. And it took a long time for us to accept, and then we accepted it. And then we realized that after people were giving water, you know, clean running water in those slums, they had a bill to pay for water. And the bill was a substitute for tenure because they have an address. You have an informal market which becomes formal, because it was legal, because people could do it. So you have to legalize. It doesn't mean necessarily that we have to have a registry in the cadastral, in the formal cadastral, because that may take 20 years.
In a way, the Kampung in Indonesia, you could consider an entire neighbourhood as a condominium. So it's a condominium and within this condominium, you establish the rules which are specific to the condominium. And then let people trade. They know what is the boundary of their lot, usually, they're very small. And everybody knows that and says, if you have three or four witnesses, you will have a piece of paper. And little by little, then you could formalize it. But I think that recognizing the informal trading of land, making it legal, and including, by the way, we found then in the Kampung that even banks now accept as a title, just the water bill. you know, there is a water bill, Mr So and so during last five years had paid this water bill at this address, and you know, you don't have the former survey, but you know, the lot is, say 50 square meter, and a bank will accept that as collateral, because it's recognized by the government, it's not going to be bulldozed.
The problem with informal settlements is that sometimes the government will just go through and bulldoze that area, or put a highway through, and do not compensate people because they do not recognize the legitimacy of their claim. And so if you do that, then, of course, you create an enormous uncertainty on tenure. You do not encourage people to invest in their own neighbourhood. And of course, banks will never touch it, because you know, if they learn something, and then a highway goes through and there is no compensation. So I think that integrating the informal sector, not necessarily making it formal in the sense that they have to follow the same rule as the formal, but have special role for the informal sector to make it legal. And then look at land use regulation. That's been my problem all over the world. And that's true, by the way, in New York or Paris, that there are standards for housing which are not really reflective of what people want.
For instance, in New York, the government imposed by regulation, larger apartments than what people want. You know, there are a lot of people now in New York who are living alone who are a small couple with only one child or no child and the regulation do not reflect that, that those people will be very happy to live in a studio and they are not allowed to build a studio. So I think it's the same in developing countries. If you are poor, you can live with your family in 10 square meters, but if that 10 square meters is close to jobs and have, again, access to clean water, and if there is a school nearby, this is what is important. And you should be able to live there legally, you know, legally without the threat of being exploited or things like that.
And again, you know, you were mentioning at the beginning housing deficits, right. I don't believe in housing deficit. Deficit is only, what is your minimum standard for a house? Have you measured all the houses in Lagos to know which ones are below the standard? And what are your minimum standards? You know, is it 10 square meters? Is it 100 square meters? Do you need two bathrooms? For instance, the UN have this thing, I think you have to have, I think it's one room per person or one-half person per room or something like that. And if it's below that, it's a slum, and it's informal. It's a deficit in the housing, I don't think it is. By definition, all the people who live in Lagos live in something they can afford. The problem with housing is that they can afford very, very little, and there's no water and no electricity, maybe, I don't know. And so you have to increase the consumption of housing of the people who are already living there, it is not a question of saying this is not housing, we need to build a new house somewhere to compensate for this house.
So I think that the idea of deficit, you know, doesn't lead you to good policy. It's too abstract. You could say, you know, in Lagos, for instance, we can produce only, I don't know, 20 litres of clean water per capita, per day. And so we want, of course, to increase it to, for instance, 60 or 80 or 100. And then you will need to bring more clean water or use more clean water in Lagos, that's legitimate. Let's say you have a deficit of water in the sense that you want to increase the consumption of water. Now, when you do that, you will have to look at the income distribution curve within the city, you know, but in my book, I have several of those curves, and you will have to see if you increase the supply of water in Lagos, you have to make sure that the ones who increase their consumption are the ones now who consume very little. And so you increase their consumption. So you have to measure the consumption of these different groups. Clearly to increase consumption is not to build more houses. And people will build [for] themselves more houses if there is enough land with infrastructure. So the goal of the city is to develop more land with infrastructure.
Tobi;
So urban planners are by nature very practical people, but I'm going to ask you a bit of an abstract question. Do you think part of the problem with this housing thing is that on some level we do not really respect or extend that abstract idea of property rights to poor people? Is that part of the problem?
Alain;
Absolutely. Absolutely. I think there is a paternalism, let's say, of the elite, who consider that poor people will always be dependent on a social program. And in a way, you have a society that largely lives on markets. But then you try to condemn the poor into a kind of non-market things, you know, like putting them in public housing or saying well, wait for public housing, we are going to provide you with public housing, you know, don't worry about it. So they are in a socialist system with no property rights. You know, their property rights is going to be given to them by the government, it's not something they will acquire by themselves. So you have these two societies, and then it creates a poverty trap for the poor, you know, they cannot escape because they never accumulate capital. They cannot invest in their own house because their house belongs to the government, [it] doesn't belong to them. So I think that, yes, it's a problem of poverty right. And very often also, many cities have colonized poverty right only if you have a lot developed very formally of a certain size, you know, they will not allow people to own land if the parcel is not at least 200 square meter or 500 square meters, I don't know. And this is not correct. You know, if somebody owns 100 square meters, you should recognize that this ownership is 100 square meters because if not, if you put this minimum threshold of ownership, that means you exclude from ownership half of the population of your city, and you make them live in a non-market economy while the rest of the economy is working on the markets.
Tobi;
Let's talk a bit about density. So when I travel to New York City, I enjoyed the fact that from my hotel, I can access a cafe, I can access the cinema, I can go to my appointments, possibly all within a walking distance of 15 to 20 minutes.
Alain;
Yes.
Tobi;
That is something that I don't have in my city. Sometimes if I want to see a movie from my house, I have to drive two, sometimes two and a half hours. So how can cities in... I don't like that phrase developing world, but that's what I'll use for now. I don't like it. So how can our cities, and by us I mean cities like Lagos and co., better optimize for density or [as] I'm also seeing, ideas by some other planners or thinkers in that space saying that perhaps some of these cities have to give up on the idea of density altogether? So?
Alain;
Controlling densities, yeah, you see, every land use regulation, control density, tend to put density down, always. You have a minimum lot size. So some people would like to have a small lot, but they are obliged to have a bigger lot because that's the regulation. And then you have the floor ratio or maximum height of buildings. I think that the height of buildings should be removed. So planners say ah, ah but if we do that, we will not have the infrastructure to serve higher densities. Infrastructure is much cheaper than land, always. Much cheaper than land. So what engineers are doing, they are saying, Hey, you have now a water pipe, which is only that big. Therefore, the density cannot be more than that, because we will not have enough water if the density increases. But they are making a trade-off between land and the price of your pipe. And land is more expensive, and more useful. So I think that if they let the density increase, of course, they have to have a system of taxation on land. But again, if they recognize the ownership of land to a lot of people, they can have a type of property tax or something like that which will allow them to have the resource to pay for the infrastructure. And it's always cheaper to increase the level of infrastructure in [an] existing area, to increase the capacity than to expand further away.
So if your regulation restricts densities, it means that people will have to build somewhere else, you know, further away. And they're not going to leave the city because the planners say the density here is restricted to that, they are going to stay there but they are going to live further away and at lower densities. So many of those regulations should be audited. I'm not saying that all regulations are bad, not at all, I think the markets need regulation. But the regulation which regulates consumption, that the people themselves can see... you know, if I go into a studio which is 20 square meter, I know it's 20 square meters, if I want to rent it to buy it, this is my business, the government do not have to tell me, No, no, a studio has to be certain square meter, or at least you cannot buy 20 square meters, this is absurd. Let the consumer decide what is best for them. Because then they can... you know, the problem you were mentioning, they can make a trade-off between living in a smaller house but closer to amenities, or a large house far away from everything, you know, some people may prefer that. So regulation restricts the choice. And of course, regulation, because they have this minimum consumption standards, if you look at the income distribution curve, those minimum construction housing standards have a cost. So they eliminate automatically, maybe 50% of the population from anything formal. You know, informality is really created by regulation. It's not created by anything else.
Tobi;
I want to talk about, perhaps, maybe, there is a kind of market failure in trying to deliver density. Devon Zuegel, I'm sure you're aware [because] she is your friend, wrote...
Alain;
She's my friend, yes.
Tobi;
She wrote a blog post a couple of days ago...
Alain;
I read it, yes.
Tobi;
Very interesting. I found it very interesting. And while read in that I, because i liked it...
Alain;
Yeah, Devon, in the last line of her thing [blog], she says, I have not discussed regulation. And my experience is that most of the inconsistencies or contradictions of densities in cities are due to regulations. And I will argue with her about that. You know, that she has to do a blog on regulation.
Tobi;
I would love to read that because while internalizing the idea she was putting forward, I thought about my street. So I live on a beautiful street. There is access to a major road and so many other amenities. it's gated well secured and all that. But we have just nine houses. Landlords built these huge compound houses. And I can't help but think, every time I go back and forth, that this is an area that can actually house a lot more people. So would you say that's a failure of markets because I think that equilibrium came to be because the first settlers on my streets prefer building for space as opposed to access?
Alain;
Yeah, but that's not a failure of markets. The market is a mechanism. It's not a god, it's not a religion, it's a mechanism. So here you have people in your compound who live there because they enjoy having low density. And I hope that they paid for it, they didn't steal the lot. So they paid for it? And so that reflects the market. At a certain point, if there is demand for higher density there, a developer will come to your compound and say, I'm making a deal with you, you know, I will give you that much money, and we are going to build more houses here. Unless. Unless there is a regulation which says you cannot have more houses there, or unless the water company tell you, we will never provide enough water in this area for higher density. You know, there are market failures, by the way, but I don't think that density is part of market failures. I think the market predicts rational densities if they are free to [build].
So let us talk about market failure. For instance, pollution is a market failure, you know, there is no way to decrease pollution directly through markets. I mean, you can do it by taxing polluting cars more than non-polluting cars, you know, this you can do, but you have to address it through market mechanism. But the market itself is not going to create a non-polluting thing. The same with global warming, you know, you have to price carbon. The government has to put a price on carbon because the market will not go into putting a price on carbon. That's clear. And then for major infrastructure, for instance, say, if a large city like Lagos needs more water, you know, enough water, clean water for everybody, you need major work to get the water somewhere - from a river, from a deep well, I don't know. And this major work is not going to be created by markets. The government could use a private company to do it. But the initiative has to come from the government, to say we need that many millions of cubic meters of water in the next 10 years. And our engineers say that to do that, we need to have, say, deep well, or whatever water plants, and that will cost that many million dollars. And that will be recovered from taxation. So it could be tax on land, it could be tax on income tax, I don't know. And then we have to do this major work somewhere in the city or in the suburb of the city where you will have the water plant. So all this is not done by markets, the total amount of water which will be brought to [households] has to be done by government, it has to be planned. And after, you will allow the land market to work. If you are allowed to put a network of pipes with water everywhere, including in areas which are not yet developed, including areas which have very low density but could not densify without more water.
Tobi;
Finally on housing before I move on, do you think that some of [the] newer propositions or technologies like blockchain, for example, hold any promise in terms of land registration, and generally democratizing property rights in cities?
Alain;
It's quite possible. I am not knowledgeable about [blockchain]. I'm very interested and intrigued by blockchain but I have not seen an example yet. But it's quite possible that yes, this could do it. Yes. You know, at the beginning I was talking about the problem of formal cadastral you know, the traditional property rights [that is] given the cadastral way [where] you have a surveyor from the government who starts taking [measuring] things, and this is very slow, it's very costly to do. It's possible that there are better ways of doing it. And it's possible that blockchain will be [it] but I've not seen an example yet, but it's possible and it might be a good way to start in a city like Lagos, just to try it, see [if it works].
Tobi;
Interesting. So let's talk about charter cities. I know you're very good friends with Paul Romer. I became intrigued by the idea when I first saw his presentation. And I've sort of followed how that idea developed. But first of all, why do you think some of these projects failed? The one in Honduras and Madagascar? Yeah. What do you think were the pitfalls?
Alain;
Because government were not ready to allow a [...] charter city, they saw that as just a new real estate development, and they thought that they could control it. And if the existing government control it, it means it's going to be a traditional city, it's not going to be a charter city. I think that in Honduras it was very clear. In Madagascar, I'm less aware of the details. But in Honduras, I follow the [development]. By the way, there are several new charter cities in Honduras now, I'm curious to see if they will succeed or not. Actually, Devon is involved in one of them. And I'm curious... sometimes I'm a little uneasy when I see that one of the first things that the promoter of a new charter city [does] is asking a big architect to put the design first. To me, a charter city is, again, developed land, and the possibility that you were talking about the beginning, democratising land ownership. That means that if you move to a charter city, and you want to open a small restaurant where you will sell sandwiches to workers, you should be able to either rent or buy a little piece of land where you will build your restaurant. You should not go through the government and say I want to open a restaurant, please give me a permit.
So for me, a charter city is first a layout of streets, not building, you know, it's a layout of streets where you can buy very small pieces of land. And you can buy some big one, you know, maybe a department store or an office building so they want a big lot, that's fine. But there should be small lots available to people who move there. Because, again, the indispensable people are not only bankers and architects and lawyers. Indispensable people are the people making sandwiches. And so I think that one of the problems is that they have to start with the layout, and making land available to all sorts of people, including very small lots. And I think that will work.
Now, my argument was Paul for the first part of your question, but when we first discuss it, you know, when we started working together, and he told me, well, we think that we could do 50 charter cities, you know. My first reaction is, cities are dictated by location and there are no more locations for 50 cities. The good locations are all taken. So if you want to start from scratch, you go to the countryside, and, you know, you have some farmers there even and you say, Oh, the land is very cheap there because there is nothing, why don't we do a charter city? In Lagos land is so expensive. Don't forget that a city is people, it's not the sewers. You're not going to move to a city because it has a nice sewer system, you are going to move to a city because there are jobs, because there are other people you want to work with or be friends with. So the problem with any new city is, who is the first one? Would you leave Lagos for, let's take NEOM in Saudi Arabia (the city that the Saudis want to build)
Tobi;
Yeah.
Alain;
So if I told you, okay, in NEOM we could give you a house for $50,000 and it has this fantastic infrastructure. Would you leave Lagos to go there? Unless you know how many people are already there? Are you going to move by yourself or with your family? And you don't know if the schools are working? You don't know if there are restaurants or bars there, you know, [finding] bars in Saudi Arabia is always a problem. [laughs]
And so you see, that's the problem. I have an example to explain the problem of a new city. In South Korea, they thought that Seoul was too large, and they thought that they would build a satellite town which will be self-sufficient. So they calculate how many jobs they will need, how much housing and the Koreans are very good at that, they really planned it extremely well, it was financed very well too. They matched exactly the number of jobs and they use the demographic, everything. And they're very good at logistics too. So they built the school, the sewer, the transport, the buses, all at the same time and well done. And it was nice architecture. So the idea was it will be self-sufficient [and] that the people who live there will work there. When the city is fully built and inhabited, they found that 90% of the people who live there commute to Seoul. They work in Seoul, but they live in the New City; and the people who have jobs there, they come from Seoul, they live in Seoul but they work in the New City. Why that? Why didn't they manage to match the thing? It's a question of the first inhabitants. When the plan is finished and the thing is ready to be sold, they told firms in Korea, well, you know, if you want to establish yourself here, you could have a factory of this and it will cost that much and you will pay that much more for electricity, So very attractive. So the firms say, Hey, we are in Seoul right now, but we want to expand, and in Seoul, we cannot expand because land is too expensive, so let's move to this new city where we'll something more modern.
Now, these firms, if they have the money to move to the new city, completely new, it means that they already have employees, they have [an existing] business. So they are not going to fire their employees and say we are going to recruit entirely new employees. So the employees which are already in Seoul, working in the old site are going to commute to this. Now, why don't they say oh, we have this new job there and we are going to move into an apartment in the new city? Because where they are now, maybe they have their mother-in-law who is babysitting their kid and they cannot move. Or maybe they have a school that they like a lot for their children. And they don't want to move their children to a new school which has no record. You know, there are a lot of reasons why people don't want to move, or maybe because there are a couple and one of them is working in the neighbourhood and do not want to commute. So the new firms are attracting existing employees from outside and the people who take housing there... you know, if you are a young couple in Seoul, you are desperately looking for a new apartment, but it's too expensive and suddenly, they propose you a nice apartment in the new city... Now, you will need an hour 20-minute commute but you think well, this is a really nice apartment, there will be a nice school so you move there with your family. But your job is in Seoul, you know, because if you can afford an apartment in the new city it's because you already have a job. So you're not going to quit your job and say, Well, I've moved to the new city, I'm going to look for a job in the New City. Maybe after 20 years, you will do that. But initially, you won't.
So you see this is a problem of new cities and that will include charter cities unless the charter city becomes so attractive in terms of, again, the democratization of land use, and of property rights. But again, you have the problem of the first mover, you see. So that's why cities like maybe Abuja or Brasilia are successful because they are civil servants so they are obliged to go there. And the government pays for it and all the taxpayers, by the way, all the taxpayers of Nigeria are paying for Abuja.
Tobi;
Yeah, that much is true.
Alain;
Yeah. And this is true also for Brasilia, you know, the people who live in Brasilia are not paying for their infrastructure, it's the Brazilians who live in Recife or Rio de Janeiro who are paying for that. So, you see, those examples are not very good examples - the new capitals. The other thing which is very difficult, and I saw that when I was working in China in a new economic zone which usually piggybacks on a city is the cash flow. You know, when you build a new city, there are certain things that are discrete, you know, for instance, you cannot build a sewer plant for 500 people, you are obliged to build a sewer plant for at least 10,000 people or 20,000 people and when you build that you have to spend for 10,000 people but you will not get 10,000 people before five or six years. So you pay interest on this capital for five or 10 years. So you have a negative cash flow for a long time and that is [for] the sewer plant but that's true for schools, that's true for roads, that's true for the water system, that's true for garbage removal, you know. You need right away to bring trucks to remove the garbage to treat it and before you have [enough] inhabitants. So you have to pay a lot of interest. My experience in developing a new economic zone in China was that the cost of interest during construction (that means the cost of interest before the lots were sold to the private sector) represents sometimes 40% of the entire expenditure.
So this negative cash flow, if it's a private city, by the way, you have bankers, so the banker, let's say, trusts you. And they say, all right, you have planned to have, say 1000 people, the second year at 10,000 people, the fifth year... and then 100,000 people in 15 years. So they trust your business plan, but then imagine that it's a little slow at coming. So you are borrowing more and more money, and at the same time the bankers get cold feet, and they say, we are not going to go roll over your loan, because you know, your thing… it's too risky, you are accumulating a negative cash flow much longer than we thought. And then they will cut your finance, and then you will go bankrupt. And that's why the most successful new cities are capitals because the entire country is paying the bill, you know, money was no object.
Tobi;
Does this mean you're bearish on private cities generally? So I'll give you some examples. And I'll try to be brief. For example, in Lagos, there was this project called the Eko Atlantic project. This was a land that was basically reclaimed from the Atlantic Ocean, it raised $6 billion, right. And at the end of the day, they ended up building office buildings for oil companies, banks and skyscraper apartments that cost $2 million. Almost nobody goes there to work, which fails the labour market condition in my view, right. There was also the story of Gurgaon, I'm not sure I'm pronouncing that right. In India...
Alain;
A suburb of Delhi. Yes, yes.
Tobi;
Yeah. So, where, maybe it was partly driven by the labour market, the tech workers and private firms. But we saw that they could not deliver on things like the sewer system... public goods investments failed woefully. But the common thread in some of these narratives and initiatives, and of course, you know that private cities are very, very hot right now in Silicon Valley...
Alain;
Yes. Sure
Tobi;
Is to look at Shenzhen and say, oh, yeah, this was a fishing village of 30,000 people...
Alain;
Yes, yes. Right. Yeah.
Tobi;
And it's now the manufacturing capital of the world, the centre of technology with 50 million people. So are you bearish on private cities generally, that was one? Secondly, what are we missing from the Shenzhen story?
Alain;
You know, Shenzhen by the way, I know it well, because when it was a little more than a fishing village, I was working for the World Bank… the Chinese invited me there with the team. We were five or six planners and economists. So at the time, it was about 300,000 people, but dispersed, it was not really a big city. And they say we want to build the city of, at the time they say, 4 million people and we want the World Bank to finance it. And this is one skeleton in my closet. I told them you are too ambitious. If you want to build a city of two million, up to 2 million, you know, I made a back of an envelope calculation, I say look 2 million is a city is so large, so fast [and] would be impossible because of logistics. You will not have enough trucks, it will be impossible and I was wrong. So after that, I followed because I was spectacularly wrong. I followed what happened in Shenzhen I went there regularly and you know what created Shenzhen? First, location.
You know I was telling you at the beginning [about] location. They have a deep port. A natural deep port in Shenzhen and you know the rocks are going there. And it's next to Hong Kong. Hong Kong port is already saturated. They are at a coveting distance from Hong Kong. So when they want somebody very specialized - an architect, an engineer - at the time when they built it, that was in '83, you know, when I was there, '83-'84, the needed manpower will commute from Hong Kong. They will spend maybe the night in Shenzhen and go back. And then you have the Pearl River Delta on the other side of Hong Kong, you had Guangzhou, you know, which is a very important city too. So, they are in between.
Now. The major thing which did the success of Shenzhen was Deng Xiaoping [who] for the first time in the history of China, put a line around Shenzhen and say within this area, the firms are going to pay the workers according to [the] market, and people who come to Shenzhen will negotiate their salary with their employers, depending on their skill. In China before that, if you were, say, a geologist, at 30 years old, the government will say your pay is this per month, period. If you are a welder, the government will say, for entire China, this is your pay, and the government will decide where you will be employed. You have no labour market, there was no labour market in China, you know, people were unemployed, but the government tells them where to [work]. Even the kid coming out of high school, the government will say you're going to work in this factory for the rest of your life. Now, in Shenzen, for the first time, you had the labour market, and a lot of Chinese coming from the north, from all over China (the ones who were the most courageous, you know, [it's] a bit like migrants coming to Lagos are the most courageous in a way that, you know, it's a selection of people) they decided that they were trusting their own skill, they say, we'd rather work and negotiate our salary and change employment when we want rather than stay with it.
So you had an influx of people, of talent, from all over China. And that's why, you know, Shenzhen is in an area where everybody speaks Cantonese, normally, you know, in the south of China, like Hong Kong or Guangzhou, but you will find that, in Shenzen, most people speak Mandarin, because they came from all over China. They didn't [all] come from there, [the southern part]...some people from Guangzhou, obviously, from the Pearl River Delta, but say the language that you hear the most is Mandarin because they came from all over. So, you see, what created the enormous success of Shenzhen was the market. It was the labour market. It was the first time you had the labour market in China. And then after that, they used experiment, and you had that, you know. And by the way, housing, also… it was the first housing on the market that people will be paid at the market price, but then with their salary, they will have to pay for housing. Where before in China, housing was provided by your employer entirely. That means that you have no mobility and you have no capital either, by the way. You cannot leave your job because if you leave your job, you have no savings, and you have no house.
So that's the story of Shenzhen, and do not forget the location. Look at the container port of Shenzhen, it is one of the best in the world and it's because location, you know, it's even better than Hong Kong. It's larger than Hong Kong's. In Hong Kong, they have to do a lot of land reclamation, whereas [in Shenzhen], it's natural. They don't need to dredge it or anything, you know, it's a natural beauty. So that's the story. So I am not bearish. You know, I like the idea of trying new cities and private cities, I think that's a good thing. But let's say, you know, just to think that if you have a good infrastructure, you know, [when] building [a] new city, they say, Oh, we will have this fantastic system for removing garbage by vacuum and things like that, this is good and well. If the city is reasonably clean, that's good enough, you know, and you don't move to a city because the garbage is vacuumed. You move to a city because there is a good job, the city's attractive, you have bars, cinemas, and you know, whatever, if you'd like to go jogging or things like that, you have nice parks. But you move to a city mostly because of the people who live there. So the question of new cities, how do you attract a lot of people right away in the beginning? Who will be the guinea pig to live in this new city? And then there is the financial aspect, you know, this cash flow, you need to have a lot of money in advance to finance it because bankers will get cold feet. Maybe I've been talking too much and not [...] enough questions. I enjoy it. That was very interesting. I hope maybe we can do it again sometime.
Tobi;
Okay. Thank you very much.
TALKING CITIES WITH A LEGEND