China’s Private Cities
In Rising private city operators in contemporary China, Jiao and Yu report that China’s private cities are growing.
…the last decade has witnessed a large growth in private city operators (PCOs) who plan, finance, build, operate and manage the infrastructure and public amenities of a new city as a whole. Different from previous PPPs, PCOs are a big breakthrough…they manage urban planning, industry development, investment attraction, and public goods and services. In other words, the traditional core functions of municipal governments are contracted out, and consequently, a significant neoliberal urban governance structure has become more prominent in China.
In the new business model, the China Fortune Land Development Co., Ltd. (CFLD) was undoubtedly the earliest and most successful. It manages 125 new cities or towns with a total area of over 4000 km2. Founded in 1998, the enterprise group has grown into a business giant with an annual income of CNY 83.8 billion in 2018. The company’s financial statements demonstrate that the annual return rate of net assets has grown as much as 30% annually from 2011 to 2018, which is the highest among the Chinese Fortune 500 companies.
As Rajagopalan and I argued in Lessons from Gurgaon, India’s Private City the key development has been to scale large enough so that the private operator internalizes the externalities. Quoting Jiao and Yu again:
The key to solving this problem is to internalize positive externality so that costs and benefits mainly affect the parties who choose to incur them. The solution of the new model is to outsource Gu’An New Industry City as a whole to CFLD, which becomes involved in the life cycle including planning, infrastructure and amenity construction, investment attraction, operations and maintenance, and enterprise services. In this way, a city is regarded as a special product or a spatial cluster of public goods and services that can be produced by the coalition of the public and private sectors. The large-scale comprehensive development by a single private developer internalizes the externality of non-exclusive public amenities successfully and achieves a closed-loop return on investment.
As a result private firms are willing to make large investments. In Gu’An, an early CFLD city, for example:
CFLD has invested CNY 35 billion to build infrastructure and public amenities, including 181 roads with a length of 204 km, underground pipelines of 627 km, four thermal power plants, six water supply factories, a wastewater treatment plant, three sewage pumping stations, and 30 heat exchange stations. The 2018 Statistical Yearbook of Langfang City illustrates that the annual fiscal revenue increased to CNY 9 billion, and the fixed asset investment was approximately CNY 20 billion, and Gu’An achieved great success in terms of economic growth and urban development strongly promoted by the collaboration with CFLD.
By the way, The Journal of Special Jurisdictions, is looking for papers on these cities:
Although a relatively recent phenomenon in urban development, Chinese Contract Cities already cover 66,000 square kilometers and house tens of millions of residents. They host a wide range of businesses and have attracted huge amounts of investment. In cooperation, local government entities, private or public firms plan, build and operate Chinese contract cities. Developers obtain land via contracts with local government or long-term leases with village collectives and enjoy revenues generated from economic activity in the planned and developed community. Residents contract a management firm for housing and other municipal services. In that way, Chinese contract cities offer innovative solutions to urban finance, planning, and management challenges.
The Chinese Contract Cities Conference will offer the world’s first international gathering of experts on this important new phenomenon.
…The proceedings of the Chinese Contract Cities Conference will appear in the Journal of Special Jurisdictions.
See also my previous post on Jialong, China’s Private City.
Comments
Having spent decades around and in corporations, I'm skeptical. I can imagine how it might work with well thought out goals and metrics to measure how things are working, but I'm too familiar with how corporations can become obsessed with their own internal goals (profits, quarterly reporting, managerial ambitions, social or business dogma) and eventually co-opt the government organizations that monitor and regulate them, to eventually work primarily toward the serving the corporation/government at the expense of the community.
It seems you need transparent and incorruptible checks and balances of some sort to make this work long term. I have little faith in either of those requirements over time.
>eventually co-opt the government organizations that monitor and regulate them, to eventually work primarily toward the serving the corporation/government at the expense of the community.
Fair point. The big question is, does the all-government model do any better? Or does that model merely start at your failure point??
100% correct this is the relevant benchmark.
Given that the free market has produced the vast preponderance of advances, I would be willing to wager that the private model will be superior, assuming full accounting.
Fair points. Not pretending I have an answer. Some governments are better than others, the same some businesses. The best seem to be the ones that have cultures with the best definition of service their constituents or customers and are most devoted to it, the ones that pay the most attention to direct feedback consistent with their definition of good service.
That said it's one thing to have the power of law (local government) OR be motivated by profit. Both at the same time seems to lead to too much temptation to ignore feedback, to overpower their original purpose with their own concerns, and come to a bad end.
To me, it seems that "private cities" are just government by some other means that often looks very similar. Where the private city model might differ most significantly is that if carried out more, you might have more variety in types of city governance across the different privately developed cities, but some of these private cities may actually be quite authoritative in their governance.
For example, I grew up in a privately developed and managed subdivision. It looked just like the privately developed subdivisions that were in city boundaries. We had a Home Owners' Association with much stricter rules and enforcement than I've seen in any city I've lived in, that included approved paint colors for your house. But it mostly was just like anywhere else. For policing, they just paid a fee to the county sheriff for extra patrols. It was a lot like the local governments around us, with just stricter enforcement of home colors and leaving your trash cans out in view of the street.
There's also an argument from Tiebout sorting that you'll end up with an equilibrium of similar costs and services when cities compete with each other, and that could also occur if all cities were private. For instance, I'm not sure there would be that many offering gravel streets since most people like paved ones.
One upside with public cities is that there are some built in citizen rights in their governance, some of which may not arise if cities were all private. But I might be very wrong on this front, too.
But in general, I see cities as already competing in a market, with some constraints placed on them by state policy. But I'm not sure those constraints would look much different if the cities were "private."
There have long been retirement communities in the U.S. that are large enough be, essentially, private cities. I have relatives who live in one that has thousands of homes and condos, a private road network, miles of bike paths, restaurants, parks, athletic facilities, a marina and golf course. It's been around for decades without exhibiting those kinds of issues (as far as I know -- they've lived there for more than 20 years and have not made those kinds of complaints).
"It seems you need transparent and incorruptible checks and balances of some sort to make this work long term."
When have city government ever been transparent with incorruptible checks and balances?
Yes, there are many incentives acting on the private manager. Some of them are internalized by making the city large enough, but others are not. Without some form of negative feedback (e.g. the threat of losing an election in a democracy), how are the managers discouraged from operating mostly for the advantage of the management? Yes, there might be some pressure from the national or regional government that grants their charter, but co-opting those regulators is a problem that has always been solvable with favors and red envelopes. Neither the regulators nor their superiors are ultimately accountable to the citizenry either. In the long run, how can that system be stable?
China's system where all power flows from the center suffers from a brittleness because of its dependence on a God/King in Beijing who is incorruptible, all-knowing and acts only in the best interests of the people. That can work for a while, but is inherently brittle. Leaders who hold power too long become isolated, paranoid, and prey to those around them who wish to enrich themselves with that power. Deng tried to counteract that with term limits and consensual power at the top, but ultimately this model did not long outlive him.
Will private cities work? In the long run, not without some form of feedback from the residents, which would look a lot like democracy. Putting the management up for tender every 5 years, with the residents choosing among bidders, could be a successful model, for instance, but I can't see Beijing allowing that. Private cities could do quite well for the first 10-15 years, but I don't see how they self-correct long term.
"Without some form of negative feedback (e.g. the threat of losing an election in a democracy), how are the managers discouraged from operating mostly for the advantage of the management?"
Now this is an excellent point.
I'm reminded of how timeshares have worked out. They have indeed suffered from exactly that effect. They have a bad reputation due to treating the nominal owners badly in favor of policies profitable to management.
I think the owners in the private cities should have significant voting rights to make this viable in the long term. At a minimum, owners of property who are not employees or affiliated with the management company should have 51%+ voting rights.
"owners in the private cities should have significant voting rights"
Forget it, JWatts, it's a China town.
I'm reminded of how timeshares have worked out. They have indeed suffered from exactly that effect.
My sense is that the big problem with timeshares is the use of high-pressure sales tactics that seek to exploit people's status anxieties. That and the fact that the model seems fundamentally flawed. In any case, *far* more common than timeshares in the U.S. are condo and subdivision developments with private streets and other amenities that are governed by HOAs, and those do not suffer from the peculiar issues of timeshares.
"are condo and subdivision developments with private streets and other amenities that are governed by HOAs,"
HOAs are governed by the actual Home Owners. That's the point. Whereas, Timeshares and the private cities above are NOT governed by the actual Home Owners.
Well, the Chinese private cities don't have elected HOA boards or elected local, regional, or national officials either. It's just not a democracy on any level. But in the U.S. governing boards of HOA controlled developments ARE elected by residents.
But I don't see how Chinese private city residents are worse off having their city run by unelected managers vs public cities run by unelected officials. The lack of democracy in China problem doesn't really have anything to do with public vs private.
If you objection is 'hey, not having democracy sucks!' I'm with you. But if you're claiming that people are fundamentally worse off in an private, HOA development than a traditional municipality, then you need a different argument.
e.g. the threat of losing an election in a democracy
I think in practice that becomes, "Get while the gettin's good."
I would imagine a ruthless profit-maximizing private city would do things like:
1) Start finding ways of excluding undesirables such as requiring proof of work or residence to enter certain parts and making it very difficult to reach certain shopping areas through affordable public transportation.
2) Focus on recruiting residents who don't have kids or wealthy people in search of a second home. It is a lot easier to run a city when you don't have to deal with the education needs of large numbers of children.
3) Lease rather than sell property unless you are short of cash and, even then, try to find ways of retaining leverage over businesses and residents so you can seize their land and redevelop it when convenient.
In short, I think private cities can work just fine for well-off childless adults or empty nester retirees who don't have deep roots in the community. Once you have to start dealing with socioeconomic diversity, educating the children of working class and middle class people, or you have residents who feel a sense of ownership through longstanding community ties, that is the start of local politics.
Excluding people is easily done by price -- nothing else is needed. Gatehouses are often employed to allow in only residents, guests, and workers. In the U.S., education costs don't cut the way you think they do. Retirement communities are a boon to the the school districts they're located in since they pay high property taxes but send very few kids to local schools. The same goes for the county -- those kinds of developments use very few local services (they largely handle their own security, and provide their own roads, parks, recreation facilities, trash pickup, etc).
And developers of these places don't plan to be there long-term. That's not their focus. For developers, the money is made in selling the homes, not in running the place. So operation are mostly handled by property management companies that can be hired and fired by the HOA. The biggest complaint against developers seems to be lower quality 'builder grade' construction that starts to exhibit problems soon after the developer has moved on to another project.
Those are fine points, but a long-term thinking private city would realize the need for SOME children to avoid becoming a declining retirement community. Given the absurdly and almost suicidally low total fertility rate in China (and much of the West), there isn't really a need to discriminate in favor of childless adults. Chinese cities already have below 1 fertility rates. They're arguably already doing much of what you suggest!
Hotels are nice.
Exactly, due to high mobility. If a hotel isn't nice, then I just go to a different one nearby. Often without ever staying the night and paying anything. However, buying a house has far higher transaction and lock-in costs. Perhaps if all the properties were rental then it would be closer to a hotel model.
Job, kids' school, social network, family friends, etc. Renting or not, picking up and moving to another city is not at all comparable to choosing a different hotel.
Agreed. Some hotels are nice and others not so nice.
Hotels are subject to high transparency and through competition accountability. Even before the internet, those of us who traveled professionally knew how to use information to find the nice ones and avoid the not so nice. The odds of finding nice ones improve where there are chains that set high standards and where there is significant competition.
Any "study" of china is suspect. There is simply no good source of information on which to base your study on. take for example, the photo accompanying this post, it is a rendering. Does the place actually exist? what is the state of the buildings today? If the entire town were to collapse tomorrow.... would you even know? or has it happened already?
Exactly so. Reminds me of "Forest City" in Malaysia, promoted as a new development for middle class Chinese, across from Singapore. A beautiful showroom, rendering, looked like a dream. Turned out the construction quality was very poor, land was reclaimed from the ocean without letting it settle properly for a couple of years, hundreds of Chinese home buyers had no recourse.
As with all Chinese infrastructure, a question must be "Who stands behind their debts, and will they honor them with a need for bailouts, should debt outgrow asset value?"
Short and long-term, it’s not obvious what the words "private" and "public" mean in this context.
Private cities in the land ruled by the CCP. Two cities, one country sounds like the sort of slogan which would appeal to poential buyers.
One diktat from the central committee and no longer private anything?
Of course. That's how Socialist nationalization works. And authoritarianism.
Point being china seems a strange locale which gels with the concept of a private city.
I am going to bookmark this, and in 20 years or so we can discuss the failure, collapse, scandals, and bailouts.
The only question is where do the newly minted billionaires relocate to with their rake.
Horseshoe theory applies to neoliberalism and communist totalitarianism, too. Our elites are so jealous of the Chinese state's freedom from democracy and traditional society that they can hardly stand it.
Do these cities feature a lot of local monopoly? I would suspect that the private cities are quite able to make large profits by granting exclusive rights to individual firms. Unfortunately my priors are that collusion and crony capitalism is the order of the day in this seemingly sunny development.
Unless the private cities are very large, or very isolated, they're not going to be able to charge very high rents. For businesses like restaurants, residents will always have the option of going outside to dine. And for businesses producing tradeable goods -- they have no particular reason to locate in the private city unless they can get competitive pricing on facilities.
To attract residents, the private cities would need to offer an attractive package -- which would not be improved by the prospect of residents serving as captive customers to be fleeced by cronies of the managers.
How do these private cities differ from Reston, Va or Columbia, MD which which are US examples of privately planned cities?
I wonder if they need to offer 30% of the apartments to minorities too
The lunar new year video of Bill Gates praising China for its Covid response is very disturbing and not getting enough attention.
How much of the global elite is willing to kowtow to the CCP like this?
It's also weird that Gates is 65 but sounds like he is 80.
Is there any information about occupancy rates or how many people have lived there? It wouldn't be the first real estate investment vehicle in China that was driven by a need to invest somewhere, but without the ability to easily move money outside China, people buy any kind of real estate. It is not so interesting that people are putting money into a private city, but are people living there and preferring it to public cities generally?
I'm surprised that "Evergrande" does not appear in this post.
Interesting concept. I'm trying to decide if this private designation is like Microsoft or more like Lockheed Martin.
I support private cities, but what good does they do without better public management. IMF has just updated its GDP growth forecast for Brazil this year: little above 0%. It is a seven-year recession -- the kind of thing that usually only happens after the Pharaoh has had two dreams and the magicians and wise men of Egypt could not interpret them. After three years of Bolsonaro Administration, it has become clear Bolsonomics failed and failed hard.
Outside the private cities, firms and government collaborate, not only with government funds/loans, but in management, with co-CEOs, one appointed by the firm and the other by the government. There is much we could learn from China's version of state capitalism, including private cities, but we won't because this is America.
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