The Fantastic Horizon: How to Invest in a New City

Editor's Note: Rapid urbanization and resource scarcity pose problems—and opportunities—for businesses and governments all over the world. But who can best lead the building and developing of these municipalities? One model: promotion and regulation by the private sector. Harvard Business School Senior Lecturer John Macomber writes about his recent investigative visits to nascent privately-funded municipalities in Saudi Arabia and Vietnam.

KING ABDULLAH ECONOMIC CITY, SAUDI ARABIA—Two days before Thanksgiving, I'm standing at the end of a pier a hundred meters from the shore of the Red Sea, facing toward Mecca. In every direction is a fantastic horizon: clear blue water, dazzling sunsets, an almost unbelievable expanse of empty sky and earth, and a development opportunity worth more than $80 billion.

Behind me across the water are Egypt and Sudan. To the north are Medinah then Jordan and Syria; to the south is the booming Saudi Arabian metropolis of Jeddah. In front of me is a vast expanse of sand and hope, fueled by a huge investment towards a brand new city the size of Washington, DC. I can see intermittent puffs from earthmoving equipment, aspirational real estate development signs, and a fledgling seaport 10 miles away from a nascent resort town.

“In the absence of massive, long view, well-financed, evidence-based investing by governments on behalf of all the people, the private sector has an obligation—and opportunity—to intervene.”

Located more than 100 kilometers from the nearest existing city, the hoped-for metropolis of King Abdullah Economic City (KAEC) is privately funded, privately managed, and privately developed by Emaar, The Economic City—a Tadawul-listed company focused primarily on planning and developing KAEC. The company plans for the city to be home to 2 million people by 2020.

Is this private model needed at all? Why can't cities take the time to grow organically, like London or Jakarta? Here's why I believe we need to go faster and better, with seven steps toward how.

My research looks at the intersection of three global phenomena. First, there is rapid and massive urbanization everywhere as people leave farms for cities in search of opportunity. Half of the world is urban today, and the urban population will double in the next three decades.

Second, this migration is largely unplanned and unstructured and it happens in an existing context of resource stress: there is already not enough clean water, clean air, healthy food, or available land and there is already too much traffic and not enough space to put the garbage. The first phenomenon—urbanization—only makes resource scarcity worse. Many observers if they notice these two issues at all generally brush them off, believing that the problems can and will be solved by better governance and more political will, that states will take care of it.

But the third troublesome phenomenon is that governments clearly are stuck and can't plan ahead for urbanization and resource stress. Some federal governments are politically stymied—the United States, Brazil, and India, for example. Others, such as China, are out of borrowing capacity.

In the absence of massive, long view, well-financed, evidence-based investing by governments on behalf of all the people, the private sector has an obligation—and opportunity—to intervene. I'm interested in the opportunity. I'm interested in sustainability as defined by economic competitiveness and the resource-stretching aspects of environmentalist thinking.

I think back to a day in June, 2011, when I was standing on the Starlight Bridge outside Ho Chi Minh City, Vietnam. In front of me a young couple posed for wedding photos in a pretty park. To my left was the bustle of the former Saigon. To my right was the Saigon River and beyond that, coconut swamp and the remains of Viet Cong tunnels from the American War. And behind me was Phu My Hung, a new section of Ho Chi Minh the size of Manhattan and scaled, like King Abdullah Economic City, for two million inhabitants. Being 15 years ahead of KAEC, Phu My Hung was already in full swing—proving the promise of a privately-funded municipal venture.

Both the Phu My Hung and KAEC endeavors are bigger than the most ambitious mixed-use real estate projects, they are funded by promoters with deep and patient pockets and a long view of value creation, and with ambition to help an entire country grow. Land was made available by government but both cities benefitted from an ability to streamline regulations and approvals. Phu My Hung was funded by industrialists from Taiwan who were systems thinkers, long horizon investors, and nation builders. King Abdullah Economic City was funded by private investors and with proceeds from the largest IPO in the history of the Middle East. These are not short view real estate traders.

Key Lessons

What can we learn from these two projects, joined in common purpose but separated by 10,000 kilometers, Islam and Buddhism, and 70 inches of annual rainfall? What is the urban opportunity? How can investors and companies grasp it? Here are seven key lessons:

1. New cities must have a purpose: There must be a reason to exist. For both of these endeavors, it's to provide jobs; either in a special export zone or in a new seaport. The struggles of New Songdo City in South Korea, for example, highlight a lack of clarity in objectives between building a bedroom suburb or a freewheeling entrepreneurial hub.
2. A competitive infrastructure is vital: Each of these projects put down a main trunk road of more than 20 kilometers, with room for mass transit in the median. Each invested in central water and waste and electricity generation so that, yes, it would be cleaner than having businesses and homes run their own diesel generators—but also so that businesses could benefit from competitive cost factors. First costs were high. Operating costs are low.
3. Stick to the master plan: Master plans need to encourage masterful planning. They can be flexible and strategic, but value is created in proximity and in phasing. Uses need to be near each other for both economic competitiveness and to save the environmental costs of long car transit.
4. Without density, there is no sustainability, in the words of the Dutch architect and thinker Rem Koolhaas. The buildings and the people need to be close together. This saves time, fuel, water and pollution. There is bad density of course…but good density can be varied, and green, and fulfilling, and efficient. Think Central Park in New York or Central in Hong Kong.
5. It's important to work within a trusted regulatory environment: Taking a page from the playbooks of Singapore and Switzerland, both KAEC and Phu My Hung worked within national and provincial frameworks to establish extra transparency, extra processing speed, a consistent tax and fee regime, and often contractual agreements between tenant entities that supplement the dispute recourse that might be available in courts. This made the projects safe for the extensive amounts of third party capital that came in to build port facilities, factories, processing machinery, buildings, and jobs—capital many times greater than the initial investment by the promoters.
6. Privately-funded cities must provide total services: These fully integrated, standalone new cities took on security, education, communication, and governance rather than depending on—or leaving it to—government alone.
7. Real estate does not create value on its own (although it creates wealth for some people): The lesson of successes like Iskandar in Malaysia are that real estate follows other activity: population growth and GDP growth. Dynamism and jobs can't be created on a large scale just by people wanting to live in a place if it has no economic or cultural core. Vanity resort developments are not replicable for a billion people needing new cities; the real value comes from the momentum and scale of integrated business, government, and social activity.

Phu My Hung is built, with the vision and capital of an exceptional set of investors. Can it be replicated? On the fantastic horizon, King Abdullah Economic City is just a glimmer. It's challenged by the fact that it's miles from another city; it's not a satellite of Sao Paolo or Shanghai or Cairo. But, funded by private sources, it is attracting investment. It's not dependent on petrodollars. If this model works here, maybe it can be a financial and organizational template for hundreds of new cities. The horizon draws nearer.