How to create a city

Iyinoluwa Aboyeji, more commonly known as "E", co-founded two tech start-ups worth more than $1bn before he was 30. With two unicorns under his belt, he is already one of Nigeria’s, if not Africa’s, most successful young entrepreneurs. Now he has his sights set on building something bigger: a city.

Itana, as it will be called, is still more of an idea than a reality, though the land has been purchased and some prominent backers found. Several thousand people, mainly coders, techies and start-up types, are on a waiting list to move to the 7.2 hectare location outside Lagos — just as soon as it is built.

Among the backers are Patri Friedman, Milton Friedman’s grandson, a libertarian whose Pronomos Capital is dedicated to establishing "charter cities", new jurisdictions on empty land with their own legal frameworks and governance systems. (Friedman’s other claim to fame is as founder of the Seasteading Institute, which advocates the creation of autonomous oceangoing colonies housed on floating platforms.)

The Africa Finance Corporation, a pan-African development bank based in Lagos, is also about to make a substantial investment in Itana, according to two people familiar with talks.

Charter cities are the brainchild of Paul Romer, former chief economist of the World Bank and recipient of the 2018 Nobel Prize for economics. Romer postulated that the main obstacle to economic growth and the creation of well-run societies was poor governance. Why, he asked in a 2009 Ted Talk, did many Africans have access to mobile phones, a modern technology, but not to electricity, which became widely available elsewhere more than 100 years ago?

The answer came down to rules, bad ones. In the case of electricity, many governments insist that power is provided cheaply, a vote-winner, especially with middle-class urban residents. But providers will not sell electricity at a loss. The upshot is that 600mn Africans are not connected to the grid.

That is a small but telling example of how countries get bogged down in political and economic realities or trapped in history — what economists and social scientists call "path dependency". Many governments lack the competence or legitimacy to break free. They operate within political systems hobbled by corruption and lack of trust. The worst governments are more interested in looting the state than expanding the economy.

Romer says that some leaders have found a way out, what Silicon Valley types call a "political hack". They bypass cumbersome national laws by carving out a city with its own rules.

Singapore and Dubai are often cited as successful charter cities. But Shenzhen, in southern China, is the most celebrated example. A fishing village in the 1950s — and now a high-tech, high-rise city of 13mn people — Shenzhen was the first place where Deng Xiaoping experimented with Opening and Reform policy in 1980.

Deng helped create what Romer calls the first of several "small laboratories" from where new rules conducive to business and development, many of them already tested in British-controlled Hong Kong, could be spread to the mainland. The result, 30 years of poverty-busting growth throughout China, was the fastest economic take-off in human history.

"What people call charter cities are really an experiment in letting people fall on their own sword," says Aboyeji. "So if you think you can create economic value by doing X, prove it. And if it works, we’ll introduce it to the rest of the country."

Aboyeji’s idea for a new city stems from frustrations arising from his first two start-ups, Andela, which trains coders to work for international companies, and Flutterwave, an online payments system. Though both reached $1bn valuations, he says, their expansion was hampered by the government’s lack of interest. "There wasn’t a lot of thought given to how would you put 100,000 kids to work in this programme," he says.

Rather than deal with existing infrastructure, both physical and regulatory, Aboyeji wants to build from scratch. Still, he is leery of the charter city tag, associated as it is with wild libertarians at one end of the spectrum and would-be authoritarians at the other. "The charter city label is unhelpful because it places the private sector and government in stark opposition," he says. "It’s threatening to governments."

Aboyeji’s wariness reflects a basic conundrum of the charter city concept: why would a government deliberately relinquish power?

Advocates say the best governments already yield authority by, for example, "tying their hands" through delegating monetary policy to an independent central bank. Mauritius, arguably Africa’s most successful economy, has outsourced its final court of appeal to Britain’s privy council, improving its reputation for rule of law and becoming a successful offshore financial centre in the process.

Charter cities, say proponents, are entirely voluntary. If you want to live in one, you can opt in. If not, no one can force you to move there. "Free choice is essential for the legitimacy of the rules in a charter city," says Romer.

Aboyeji prefers to skirt such controversies. He presents Itana — "Talent City" in a former iteration — as something less radical. It is expected to have a residential population of only 3,000 people, minuscule compared with the Shenzhen-sized cities of 10mn people envisaged by Romer. Aboyeji will work closely with Nigeria’s government, not exactly the stance of an anarcho-capitalist.

He foresees a virtual network of talent cities "essentially designed to enable young people to contribute to global GDP from Africa by working on the internet". Referring to the low-tax US city that has more registered companies than residents, he says: "Itana will look a lot more like Delaware than Shenzhen."

Still, his plans draw heavily from the charter city playbook. He wants Itana to be governed by its own rules, in its case in five areas: company registration, immigration, tax, the legal system and offshore banking.

Anyone who has tried to do business in Nigeria will understand why. Aboyeji says companies registered in Itana will be able to incorporate quickly and have recourse to a trusted arbitration system outside what he calls "the very slow and arduous Nigerian justice system".

He also wants companies to have access to offshore dollars rather than rely on the whims of a central bank that rations scarce hard currency. Talks with the central bank are in progress, he says.

On immigration, Itana aims for streamlined procedures so that prospective residents can move to Nigeria without getting bogged down in the visa system. Aboyeji wants tax breaks for companies, but normal tax rates for the city’s (hopefully) high-earning individuals.

Itana is collaborating with the Charter Cities Institute, a non-profit organisation that seeks to proselytise the concept. Its founder, Mark Lutter, a fast-talking economics PhD from George Mason University, says charter cities can be a shortcut to good governance.

A few years ago, Lutter, still in his early thirties, was dreaming of founding a new city of 1mn in Sierra Leone in west Africa. That idea hit the rocks when the government grew nervous about loss of sovereignty, he says. "Many low-income countries were colonised and there’s a pretty ugly history with that. Even though charter cities are voluntary, there’s still enough association that it makes it difficult to swallow."

Investors also needed convincing that charter cities were bankable, Lutter says. "One of the challenges we face is a [lack of a] flagship project. In tech, funding doesn’t pour in until you get exit," he says, referring to the point at which, through sale or initial public offering, founding investors can realise a profit. "Once there is an exit or a unicorn, everybody’s like, holy shit, this is a thing."

The biggest "thing" in the charter city movement was Honduras. The central American country, where poverty and violence have pushed hundreds of thousands to seek a better life in the US, enthusiastically embraced the idea a decade ago. But last April, after years of wrangling, its national congress repealed the constitutional amendment and enabling legislation that had made charter cities possible.

Romer, who had initially backed the Honduran project, left after only a year having grown disillusioned. In general, he says, some of the people who have climbed aboard the charter city movement, far from being libertarians, are "wannabe monarchs . . . They want to be masters of their own domain."

Romer’s idea of a charter city is not private sector-led. He says most of the entrepreneur-led projects are not charter cities at all. Instead, he imagines a state setting up a jurisdiction and outsourcing provision of government services — such as courts, the police or tax collection — to another country, as Mauritius has done with its court of appeal.

Instead of trading goods and services, governments would trade best practice. "The true promise in the idea is that it could be used, as it was in Hong Kong, to offer effective government services to people who would otherwise have no chance [of having them]," he says.

Kurtis Lockhart, executive director of the Charter Cities Institute, says that, despite the setbacks, the idea of charter cities remains relevant. By 2050, he says, Africa, with the world’s fastest-growing population, will have nearly 1bn new urban residents. They could either join existing cities, which struggle to provide services, housing, jobs and economic efficiency, or they could move to new ones that short-circuit history, he says.

A charter city, says Lockhart, doesn’t have to perform miracles. If it can grow economically at just 1 to 2 percentage points above the national average, it will soon draw in ambitious people and establish an economic lead. If the ideal of a charter city is full sovereignty, he says, more modest versions exist, by tweaking laws at the margins.

Lockhart says several recent developments in Africa give him hope that the charter city idea is catching on. In Zambia, the new government of President Hakainde Hichilema has endorsed the concept and is seeking to pilot three charter cities, including Nkwashi (see box), a 40-minute drive outside Lusaka, the capital. The Charter City Institute has set up an offshoot in the country to help catalyse change.

Nkwashi has only rudimentary infrastructure, Lockhart concedes. But, in a promising development, he says, Leonard Wantchekon, a Princeton economist, has made a "handshake agreement" to establish a campus of his African School of Economics, a pan-African university, as an anchor tenant. That would draw students as an initial population base, he says.

Wantchekon says he is taking the idea seriously because of the haphazard, unplanned nature of urbanisation that is taking place in much of Africa. "We need to take cities very, very seriously. We don’t want cities just to happen. We need something that is thought out," he says.

Wantchekon recalls the transformative impact that moving from a village in Benin to Cotonou, the largest city, had on his life. There he was exposed to all sorts of ideas and influences that eventually propelled him to the pinnacle of US academia.

"I like the idea of thinking about developing an intellectual agenda around urbanisation," he says. "We need good cities as opposed to bad cities, but governments often lack the capacity and we need some kind of institutional knowledge to support the process."

Rwanda, a country with a reputation for effective, if authoritarian, government, has also signed a memorandum of understanding with the Charter Cities Institute. Under the agreement, Kigali, a clean and orderly capital, will host a conference on the topic at the end of this year. Rwanda’s government will also help establish the NXT50 Cities Catalyst Fund.

In another example of a charter-city-like development, entrepreneurs are collaborating with the island of Zanzibar to draw up rules intended to make it a tech hub. A semi-autonomous region of Tanzania, Zanzibar can set its own laws. It has a lower VAT rate than the mainland and more permissive laws to foreign ownership.

Daniel Yu, founder of Wasoko, a Kenya-based digital supply-chain company, is helping the government to fashion new rules. He intends to move 40 internet developers to the island where he can promise them world-class beaches as well as low taxes and good internet. "We are speaking with the government to co-create further legislation," he says. On his wishlist are a simpler work-permit regime and repeal of laws banning private companies from running their own data centres.

"In some sense, to me it is larger than a charter city," Yu says. "We are kind of setting policies for an entire government here."

Back in Lagos, Aboyeji says Itana is making progress and expects to be able to announce completion of new funding soon.

"We’ve had a number of false starts like any good project," he says, but the contours of the model are taking shape.

Of the debate about what exactly a charter city is and how autonomous it should be, he concludes: "You do require a level of independence, but I don’t think that full-on sovereignty is really on — at least not right now. What we’re trying to do is model government. We’re not trying to replace government."