Private Cities Part 2: Decentralization and Economies of Scale

Decentralization and Economies of Scale

Generally speaking cities benefit from economies of scale.  These economies of scale produce complex and expensive infrastructure that wouldn’t necessarily exist in smaller population centers.  Given both the calculation problem and the nature of the incentive structure of municipal bodies there is a tendency to under produce infrastructure.  There are some exceptions.  Some countries have made it a goal to export, and therefore overproduce infrastructure.  The vast majority of municipalities under-produce infrastructure, to the point where users begin to bear social marginal costs.  This is usually because either entry is free or the cost of entry is too low.  When the private marginal cost does not meet or exceed the social marginal cost each additional user gains more from using the commons than not using.  Ergo traffic etc.  In addition because most major developments require legislative or regulatory approval, infrastructure develops at the pace of politics not market demand.  The actual average social cost varies depending on the magnitude of under production.  From brown outs, to traffic taking days to move miles, to waiting a week for a drop of water there is plenty of sorrow at the bottom of the governance barrel.  For the best countries the worst indignities are bad traffic and a long commute.

Wise and forward-thinking political institutions and actors greatly reduce the cost of the urban transition by planning and reserving, in advance of development, space for future streets, sewage, electricity (underground access), and parks.  With advance notice of where sewage and other access points will be placed, private developers can plan to link to the main sewage lines even in advance of their provision.  Unfortunately, the developing nations where much of the urban growth will occur do not have a successful history of advance planning.  Indeed foresighted, capable, independent, and uncorrupted bureaucracies are rare everywhere.” [Emphasis Mine] Lessons from Gurgaon

Though hegemonic actors continued to develop private infrastructure in Gurgaon there quickly developed a tragedy of the commons when it came to public utilities.  Infrastructure in Gurgaon is generally spot-on as long as it is serving hegemonic actors, however outside corporate campuses utilities quickly developed into a disaster.  Exactly which bureaucracy was responsible for public utilities was not clear.  Gurgaon existed in a bureaucratic no-man’s land when it comes to utilities. Unlike land sales and permissions there are fewer rent-seeking opportunities from increasing the supply of utilities.  To boot there was no one with the clear authority to rent seek anyways.

We will begin to see the costs of having no coordinator for utilities.  This problem is a bit confounded by low trust actors and shoddy property rights.  Unfortunately there is no proper control for the social sciences.  Would a different society have solved some of these issues?  Probably, indeed many have, but it might have run into many of the same problems as well.

“Gurgaon has been called ‘the Singapore of India’, but unlike Singapore the public infrastructure in Gurgaon is poor.  There is no citywide sewage, water, or electricity system.  Sewage is often dumped in nearby rivers or open land.  Groundwater is in short supply and is being rapidly depleted.  Power outages are frequent.  In addition, public transport is poor to non-existent within Gurgaon (although a metro to Delhi opened in 2013).  Security is also poor in public areas where police are undersupplied.  In short, Gurgaon looks like Singapore in terms of private-sector development, but like other Indian cities in terms of public sector development.” Lessons from Gurgaon

In contrast to the hegemonic actors which developed Gurgaon from a cow town to major city, there was no hegemonic actor who coordinated utilities.  Gurgaon had neither a baron nor a Lee Kuan Yew.  There was neither a person who personally owned the city, nor a visionary oversee its growth.  While Gurgaon might still be an economic success, it is not a model city.  In the absence of developed public services, we have not seen Detroit. The economic growth and large capital investments instead built private auxiliaries to public utilities.

There is an interesting confluence in theory in how polycentric and bureaucratic orders function.  Both have issues where the advantages of scale may not be utilized.  The antithesis of the calculation problem is the cost of trade (transaction costs), and private overproduction.  Overproduction is not a value free-statement. In the opposite scenario of centralized control we do not in fact see *perfect* production.  We most usually see either public overproduction (i.e. nothing has changed) or the more common scenario of under production.  What can I say, humans aren’t perfect.

As such neither public bureaucracies or, as of yet, private polycentric ownership (not legal polycentrism) produced the just right amount of services.  Most people have enough in a private polycentric ownership, but there is little utilization of the advantages of economies of scale through coordination. As we will see not all goods are overproduced, in fact some will see drastic underproduction.  Polycentric private ownership creates the same problems as bureaucracy though in a very different manner. Pay attentions to which types of goods are overproduced and which are under produced.

The alternative of centralized control or ownership is not coordinated production in the sense that citizens plan together but instead a sub-group of people making an estimate of group needs.  The estimate will as always be only as good as the information available and the wisdom and incentives of the sub-group.  In the case of centralized ownership there is feedback through prices and profits.  Bureaucracies on the other hand, rarely plan ahead for population growth and are notoriously bad at anticipating problems.

Private Overproduction and Kleiber’s law

Now I must make a quick note on private overproduction.  Private overproduction only appears when the population in question has both wealth and agency.  In populations with neither there will be no compensation for a failure of commons.  Fortunately for us our case study features a population with agency or at the very least a subset of a population with agency.

 “In Gurgaon, the private sector has stepped in to address many of the failings of the public sector, with mixed success. Private suppliers have responded to the failure of the public sector by creating private sewage, water, electricity, and security. On the surface, these private systems work well for those paying, but looking beneath the surface, the costs are high. Private sewage systems, for example, often do not connect to official sewage lines, but instead lead to tanks that are periodically dumped, sometimes illegally. Private wells are common and water is tanked in, but groundwater is being dissipated and tanked water is expensive. Private electricity is far more reliable than the public system but suffers from smaller-than-efficient scales of production and excessive pollution. Private security does a good job protecting the middle class, but public spaces are unprotected, a contrast that harms even the protected, who appear to have developed a siege mentality. We discuss the public and the private provisioning of these services in detail.” Lessons from Gurgaon

To understand why private overproduction happens we must understand the opposite.  What do cities’ production of public goods look like?  There is an interesting dynamic in the size and provision of services within a city.  As cities grow large their services don’t grow on a 1:1 ratio to the population.  Broadly speaking there are both gains in economies of scale, and an increased burden on the individual.  These two effects combine to lower the growth of provision of services to proportional to Populationx (where x is less than one).

“For instance, if one city is 10 times as populous as another one, does it need 10 times as many gas stations? No. Bigger cities have more gas stations than smaller ones (of course), but not nearly in direct proportion to their size. The number of gas stations grows only in proportion to the 0.77 power of population. The crucial thing is that 0.77 is less than 1. This implies that the bigger a city is, the fewer gas stations it has per person. Put simply, bigger cities enjoy economies of scale. In this sense, bigger is greener…The same pattern holds for other measures of infrastructure. Whether you measure miles of roadway or length of electrical cables, you find that all of these also decrease, per person, as city size increases. And all show an exponent between 0.7 and 0.9.” Math and the City

This parallels Kleiber’s law, which states that an animal’s resting metabolic rate increases only at the ¾ power of Mass (M3/4).  Larger animal’s cells (or at least on average) seem to be more efficient.  The exact explanation of this is still debated.  For traditional cities, residents must bear and increasing burden in both social and economic costs.  Despite gains in efficiency it is more expensive on a per capita basis to live in a city. Some of the costs show up in social forms.  The cost the individual bears increases with the complexity of the society.  Cities are the store of most complex environments in any given society.

2000px-ApollonianGasket-15_32_32_33.svg

For a visual representation look at the fractal above look at the difference in the perimeter of the inner circles and the outer circles.  The areas of all the inner circles will approximate the area of the outer one.  The perimeter of the inner circles together will greatly outstrip the perimeter of the outer circle.  This visualization is similar to both Kleiber’s law (mice vs. elephant) and the utilities in Gurgaon (private overproduction vs. centralized utilities).  The services provided by private entities cover the same amount of properties with approximately the same needs as a similarly sized city and yet because every corporation has their own services the total amount is more than a comparable city.
What we see in Gurgaon is not the P0.77 power law for growth of services relative to population or P0.9 for that matter.  Gurgaon instead of functioning like a large mammal, with subsequent gains in efficiency (and increases on average cost), functions like a bunch of mice.  If you measured the energy required to feed a number of mice with the same mass as an elephant they would require much more food and have a much higher metabolic rate.

Water and the Environment

So let’s look at our first example for private overproduction of public goods.  Water is a necessity for any human settlement. Gurgaon, in what we will establish as a pattern, had no municipal body to plan the provision of water.  As such most of the city isn’t hooked up to any central water or sewer system.  Given that there are nearly 250 fortune 500 companies: the corporations and their employees weren’t all going to hall water in buckets.  Have money will build patchwork solutions.

“Private developers of residences and commercial parks have responded to the lack of public sewage by providing some waste-treatment services. Most apartment complexes include a sewage treatment plant. Once the waste is treated, tanker trucks transport the waste to the Yamuna River. Usually, apartment residents are charged a fee for this service. Similarly, industrial parks like Genpact have their own sewage treatment plants. Within the industrial park, they lay the sewage lines and treat the waste.” [Emphasis Mine] Lessons from Gurgaon

This situation is reflected in private residences and communities.

Private water tankers visit residences and neighbourhoods and fill the water tank of each home. In the case of apartments, builders sometimes also have a tubewell on the site, and legally or illegally tap groundwater and treat it for use by the residents.” [Emphasis Mine] Lessons from Gurgaon

When private services step in to provide what is normally public/private utilities the natural result is more inequality.  The purpose of public utilities is to democratize access to normally expensive resources via economies of scale.  For private owners utilities are a means of increasing the value and desirability of his properties.  Economies of scale make it easier for low income folks to afford access to utilities.  Without centralized utilities the cost to the individual for providing energy increases.  The end result is not that everyone has a tap, a generator or a car, but that smaller entities used their own micro-economies of scale to provide utilities.  Naturally some wealthier residents will have their own cars and generators as well.  If we for the moment ignore the inefficiencies of polycentric utilities, they work well enough for the middle class and above.

“Overall, only two-thirds of Gurgaon residents have access to piped water, and supply is intermittent. Given the shortage of this water supply, 70 per cent of all residents (including those connected to piped-water supply lines10) depend on groundwater that is privately provided (Yadav, 2012). Private water providers cover the shortage of water for a fee. Gurgaon residents buy water for both potable and other uses.” Lessons from Gurgaon

As we can see for whatever services are underprovided by public utilities, the wealth of the middle class can buy private substitutes and back-ups.  This is not the case for the lower class.  For the lower class we have a host of problems which emerge.  Homeless already create waste problems in major cities, now imagine if the entire lower class was without sewage.  Naturally a centralized owner or bureaucrat could make the choice about what to do about this issue.  In many cases they simply kick out the homeless and build utilities for the poor.

 “Even when such a connection exists, sewage treatment at the public plants is often ineffective. Public health and sanitation is especially poor for slum dwellers in Gurgaon, who lack toilets and suffer from illegal dumping of sewage created elsewhere. Illegal dumping of sewage in common areas and water bodies has also begun to contaminate the groundwater. The Centre for Science and Environment (CSE) estimates that by 2021 Gurgaon will be generating 533 million litres per day of sewage but will have the capacity to treat only 255 million litres per day (CSE, 2012, pp. 117–25).” Lessons from Gurgaon

I can’t really imagine what 255 million liters of sewage with nowhere to go per day would look like.  Granted that is a projection.  I also don’t have any reports for environmental damage from the area around Gurgaon, I will proffer this proxy instead.  San Jose a city in the environmentally friendly Bay Area has a bit of a problem.  Homeless have gathered in encampments around the San Jose area.  Naturally lacking any utilities this has created a waste problem.  Not unlike Gurgaon, “illegal dumping of sewage” is a common problem.

“Runoff from San Jose carries pollution into Guadalupe River and Coyote Creek. Trash collects in large rafts in the river and creek and is carried to San Francisco Bay during storms. Seals, shorebirds, and other wildlife are at risk for eating smaller pieces or getting trapped in debris.

San Jose’s runoff also contains high levels of fecal bacteria. People who spend time in or on the water during wet weather are at greater risk of illnesses and infection when exposed to this contamination. Additionally, high bacteria levels and trash harm fish that spawn and spend their early life in the river and creek, including Coho salmon, Chinook salmon, and steelhead.” [Emphasis Mine] Baykeeper

So with only around 5,000 people we’ve created an environmental disaster.  Now imagine scaling that to the size of the slums of a major city.  Clearly some things are incompatible: environmentalism and polycentric utilities and/or large numbers of vagrants.  I like my rivers feces free personally.  That’s just my opinion.

Electricity

Again we have an as compared to what situation here.  Gurgaon has a tragedy of the commons situation when it comes to groundwater, however bureaucracies only really solve these sorts of problems some of the time.  So at best so far we can say Gurgaon is functioning as well as a poorly run bureaucracy.  The electricity situation is very similar.  Here we can see a quantitative difference in efficiencies of scale.

“Most urban areas in India have significant shortages of electricity and Gurgaon is among the most affected. Power is produced mainly in two state-owned plants: a coal-fuelled thermal power plant with 600-megawatt capacity in Yamunanagar and another in Hisar with two units, each with a generating capacity of 600 megawatts. Haryana’s state-run distribution company, Dakshin Haryana Bijli Vitran Nigam (DHBVN), distributes approximately 16 million kilowatt-hours of electricity each day in Gurgaon. Gurgaon consumes 33.9 per cent of the load of DHBVN and contributes 40.4 per cent of its revenues. Officials at DHBVN say the supply of electricity is about 25 per cent short of demand (Raina, 2012).  Residents and businesses in Gurgaon estimate the shortfall at a higher number because they face 10-to 12-hour power outages…” Lessons from Gurgaon

That’s a total of 1800 megawatts of public capacity in Haryana.  Gurgaon only uses about 34% of this power or about 612 megawatts. The rest of the energy is used by other cities in the province. This generates just enough for at best 75% capacity of the city, though 10 to 12 hour power outages clearly indicate that this may be an optimistic estimate. Naturally industry, tech and apartments find being without power unacceptable and so there are provisions everywhere for private power generation. Private power supplies in Gurgaon are around 2000 megawatts.  So there is about a 3 to 10 ratio of public to private power.  We know Gurgaon needs more public power but it doesn’t need over 3 times as much power. If all of those 2612 ( public + private ) megawatts were supplying the city of Gurgaon centrally they’d be selling power to other municipalities.  To put this in perspective New Delhi had a peak power demand of 5,925 megawatts in 2014. That is a city with 9.5 times the population as Gurgaon and the peak demand is only a little over twice as much as the combination of private and public power generation capacity.  Now as I have stated earlier for any metric of growth of utilities etc there is usually an increase proportional to between P0.7 and P0.9 (where P is population).  Assuming there are efficiency gains from size.  Projecting backwards from Dehli’s peak demand we would get a peak demand for Gurgaon of between 777 megawatts and 1221 megawatts of power (depending on the actual efficiencies of scale).  Note these are very rough estimates but what is clear is that 2612 megawatts is overkill.

“First, prices of water, electricity, sewage, and so forth are close to marginal cost but average cost is far too high because of the failure to exploit economies of scale. Second, competitive suppliers have produced negative externalities such as excess pollution, sewage dumping, and groundwater dissipation.” Lessons from Gurgaon

This is almost a tautology considering the way power is supplied in Gurgaon.  Obviously given diminishing marginal returns emerge at scale, a bunch of private producers are going to have higher marginal returns than publicly supplied power.  Given that efficiencies at scale emerge, *gasp* at scale, the average cost of production of a bunch of small time operations are going to have higher average cost.  As far as negative externalities go, India isn’t really able to enforce its own regulations in Delhi, so it isn’t surprising that Gurgaon has problem developing and respecting property rights.  Corruption, or at least the worse kinds, tends to damage property rights.  As we will see later perceptions are often as important as reality for people’s behavior.

“…corruption means that members of the government can actually profit from shortages because ‘the government diverts power to its constituents.’ The story is reminiscent of the political economy of the Soviet Union where shortages were pervasive because shortages generated rents for the political elite (Smith, 1976; Shleifer and Vishny, 1992).” Lessons from Gurgaon

It is not necessarily the case that the government is purposefully under supplying electricity.   It would not surprise me however if the advantages of the shortage have dampened the bureaucratic enthusiasm for fixing this issue.  Keep in mind that most cities in India have massive blackouts and under-supplies of power. In addition the lack of municipal body probably doesn’t help.  Either corruption is causing these issues or governance in India is typically bad at foreseeing or meeting demand.   A combination of both is likely the case.

Private Security

It is often the case where companies will pay more for access to more reliable energy.  This hasn’t displaced private production, obviously, but it does explain some of the reason why public development has been so slow.  The distribution of security in Gurgaon reflects the same patterns as electricity production.  Just as a shortage of public electricity produced a boom of private energy production, Gurgaon’s shortage of public security has produced an explosion of private security.  This private security encompasses every type of development including “…industrial, commercial, and residential use.”

“It is common for private homes to have personal security guards, and housing complexes, apartments, shopping malls, street stores, and places of work all have private security. Overall, there are some 35,000 private security guards working in Gurgaon compared with just 3,100 public police (Yadav, 2011).” Lessons from Gurgaon

Beyond static protection of persons and properties companies invested in private transport to maintain the security of their employees.

“Firms make arrangements for the security and transportation of their employees. Genpact has 350 private drivers, whom they pre-screen before hiring. These drivers travel roughly a hundred thousand kilometres every day, transporting ten thousand employees to and from the office. Employees book daily online reservations and receive ‘tickets’ for their assigned cars. In the parking lot, a large screen posts lists of cars and their assigned passengers, as in airports. Genpact has installed GPS devices inside every employee’s private car and hires security guards at night to escort female employees to their homes (Yardley, 2011).” Lessons from Gurgaon

Note that this is a huge infrastructural investment.  These firms are making huge investments in their employees in ways not usually seen.  These are the type of provisions normally reserved for VIPs.  Granted I doubt these cars are exactly limos.

Despite the seeming dire nature of the situation in Gurgaon, as we will see crime in the city isn’t all that bad.  The money sunk into private security especially, transport seems to be as a response to companies valuing the lives and peace of mind of their employees (at the very least in a financial sense).  As Shruti Rajagopalan and Alexander Tabarrok put it:

“Private security protects people as they travel through Gurgaon, much like private security was used to protect US officials moving through Baghdad. Unlike Baghdad, Gurgaon is peaceful and relatively safe for a city of its size.” Lessons from Gurgaon

One will note that many of these companies are foreign, whether American or Japanese.  American companies of this size do not provide similar levels of security for much more dangerous cities on in their home country. Whether it is perception of the employee, or corporation of insecurity or financial incentive for smooth operations this level of security investment is unheard of for such a “safe” area.  For a reference point in America as of 1997 there were three private security guards to every one police man.  In quieter countries such as Canada the ratio was then about 2:1.

“The extreme examples are lawless places such as Russia and South Africa where there are at least ten times as many private-security guards.” The Economist

That is about where Gurgaon is in private to public security ratio.  One will note that Gurgaon is not nearly as dangerous as Russia or South Africa (10:1 private to public security).  In fact it is more in line with the crime rate of most American cities.  That is to say, it is historically awful but comparatively normal for our time.  Compare to, at the time, a similarly sized city (Phoenix) Gurgaon has approximately the same number of public police ~3,000.  If we compare Gurgaon to similarly sized cities in India they have between 9,000 and 11,000 police.  So while we know some cities of comparable size can be safely secured with around 3,000, Indians seem to use more police.  Why I don’t particularly know.  In comparison while Delhi has about 84,000 police officers it only has 70,000 licensed security officers (keep in mind there may be more unlicensed ones).  This puts Delhi on the low end of the spectrum of private to public security (at least officially).  So via comparison Gurgaon as at best one third as many police as similar sized cities and a high private to public security ratio (especially as compared to Delhi). We also know via correlation that high private to public security is correlated with higher crime.  Gurgaon however has an overproduction of private security for its population but also for its own crime rate.

“On an objective basis, private security works well in Gurgaon. Security is very good for the middle class, but admittedly less so for the poor, as is true in the rest of India. Subjectively, however, many members of the middle class do not feel secure and instead see themselves as living on islands of private security surrounded by a sea of criminality.” Lessons from Gurgaon

The likely explanation for the overproduction of security is a combination of perception and reality.  Private transports and security probably lower crime to more normal levels for the area.  What private security in Gurgaon does not do is provide the positive externality of safe public arenas.  This system works just fine objectively for the middle class and above.  Seemingly part of the problem with the perceptions is that most people judgment of safety is based on the relative safety of public spaces.  Indeed though there are many areas which are fairly safe in major cities, perception is often based on the limitations on travel.  Travel usually being done in public spaces.  A safe city is one where without familiarity with the region you can travel unmolested, and comfortably.  While one may not be concerned with the safety of poorer residents, the positive externalities of “public” safety also affect the perceptions of the same people who can afford private security.  Therefore because of a perception of danger, and maybe due to the relative danger of public spaces, private parties overinvest in private security.

Fire Protection

In our second to last example of private responses to public failure, we see an interesting dynamic at play.  Firefighting falls in very interesting mid-point between exclusionary and non-exclusionary good and downward and non-downward scalable good.  While one can hire guards to only protect a property, or transports to only protect employees, it is extremely unusual to rely solely on private fire protection.  Private fire fighters are not unheard of, however usually firefighting equipment requires economies of scale and most private firefighters seem to service municipal like bodies anyways.  In any situation fire equipment is usually mostly unused and extremely expensive.  Even in the case where one has good fire safety measures on your property, in a dense urban environment there is the possibility of fire from other properties causing negative externalities.  Your building with its advanced construction and sprinkler system may not catch fire, but if your neighbor does you might be screwed.  Unlike other services like security where the provision of security is provided at the behest of a myriad of private actors, there is a near hegemonic actor who provides most of the fire protection services in Gurgaon: DLF.

“In other developments, small and big, private firms have built parks, green belts, and landscaping, and provided crime and fire prevention.” Lessons from Gurgaon

The fire protection in Gurgaon at least on a public level is woefully inadequate.  It is by far the most under produced public good in Gurgaon. DLF being one of the two major property developers in the area has stepped in to fill the gaps.  What we see, unlike say private power generation, is not private over-production but a total production which is still under par.

“In Gurgaon, in addition to the three state-run fire stations’ equipment, private companies own another six fire tenders. As well as fire-fighting equipment in its various buildings, DLF has fire protocols. In 2012, DLF set up India’s first private fire stations in Gurgaon’s districts Cyber City and DLF Phase V, with equipment specifically fitted to deal with high-rise buildings. The DLF fire station has two 90-metre- high hydraulic platforms, capable of reaching Gurgaon’s tallest buildings. Also, DLF provides two fire tenders per station, with the fire dousers having the capacity to carry 18 kilolitres of water per vehicle. The head of fire safety at DLF has 120 firemen reporting to him, primarily to respond within DLF areas. All costs of maintaining the equipment, systems, and personnel are borne by DLF (DLF Press Release, 2012).” Lessons from Gurgaon

While the absolute number of engines and personnel is under par for a city of Gurgaon’s size it happens to be some the best equipment in the country.  DLF has better equipment than even the largest cities in the country.  In addition unlike, private security, DLF provides fire protection services city wide.  This seems rational as out of control fires can damage anyone’s property and DLF owns a large portion of the city.  As for total underproduction, there are a number of possible explanations.  It could be that DLF can get by with less equipment because it is comfortable that its properties have a reduced propensity for fire. It could also be that DLF cannot afford to provide a city’s worth of fire protection. It could also be that fire protection is one of those services which Indian cities tend to overproduce. Given the poverty of other examples of private fire protection, especially with fancy equipment it is likely that cost is a major factor.  Here we see that a near hegemonic actor did provide public services regardless of ownership of the property.  Given that DLF cannot extract rents from the entirety of the city it is unsurprising that they don’t have as large a fire department as other cities.  If there had been no large developers there might not have been private fire solutions at all.

What about the Roads?

Roads are a normally considered a public non-excludable good.  Sure you can have a toll road and sure I’m sure many companies build roads to their properties but generally within cities roads seemed to be developed as public projects, even if they have private partners or owners.  I’m not saying private roads are impossible but we will see later there are situations which are and are not conducive to private road production.  The public good being provided truly is transportation.  Roads are not the only form of public transportation, but they are the most ubiquitous.

“As late as circa 2005–2009, Gurgaon had only 1.6 kilometres of surfaced road per thousand persons. In contrast, San Francisco has on the order of ten kilometres of higher-quality roads per thousand persons. The numbers had not much improved by 2013.” Lessons from Gurgaon

Naturally not every business is just going to build its own road to nowhere to account for the lack of good public roads.  Private overcompensation comes in the form of providing company transport for workers.  This compensates but doesn’t overcome for both poor public transport and poor roads.

“Once again, the shortfall is covered by the private sector: bus, auto-rickshaw, and taxi operators, many of whom are unlicensed. These private modes of transport are often filled with twice the suggested capacity of the vehicle, because there is a high demand for transport, especially in poorer neighbourhoods. Most companies provide or contract out their own bus service for employees and also have a car fleet available for employees who work unconventional hours to meet foreign customers’ schedules.” Lessons from Gurgaon

From the perspective of space on roads and number of people moved cars are inefficient methods of moving people.  Taxis, busses and metro systems increase the number and density of people that can be moved in the same space. If nothing else public transportation doesn’t sit unused most of the day.  Cars a kind of private overproduction.  This is not to say cars are bad, there are many advantages to the individual that cars possess over alternative methods.  It seems that given the limitations of the amount of roads in Gurgaon the market (many smaller actors) has met demand.  Could Gurgaon benefit from more roads, probably, would it warrant a metro system possibly.  But again none of this will be built if there if there aren’t hegemonic actors to benefit.

Part of the nature of Gurgaon is that the industries tend to have huge complexes; between manufacturing and IT these complexes need internal transport structures.  Within property lines private entities have incentives to make improvements and provide services.  These incentives tend to end right at the property line.  Here is an example of private services which end right up at the property line from another Indian city.

“Another example is the 43-acre Infosys Campus at Electronic City in Bangalore. It is a self-contained city for its 20,000 workers, and contains shops, hotels, restaurants, health club, and a golf course. The campus is well maintained and landscaped and provides its own roads, sewage, water, electricity, garbage disposal, and free bicycles for transport within the campus. Infosys campus is an excellent example of private developers providing various public goods and civic services up to the edge of the property.” [Emphasis Mine] Lessons from Gurgaon

Where there are larger property holdings, there emerges the possibility of making improvements to increase the value of your property.  General Electric may care whether the highways are stop and go, but it would be simply throwing away money if it tried to build another metro, or highway.  DLF however being a near hegemonic actor which has huge property holdings in the area, and will continue to develop has an incentive to improve traffic.  By improving traffic and transport services to their properties DLF can increase their value and attract new clients.

“Within private developments in Gurgaon, the roads are of good quality. For example, DLF and HUDA are building a 16-lane, 8.3-kilometre road network within Gurgaon to connect the National Highway, the Delhi-Gurgaon Expressway, and the main sector roads of Gurgaon to the Delhi Metro and the new Rapid Metro lines. This network mostly connects DLF developments, both industrial and residential.” Lessons from Gurgaon

Naturally these roads don’t go to nowhere, they go to DLF properties.  DLF has little incentive to improve transportation in the rest of the city.  Again DLF is no more altruistic than General Electric, but being a near hegemonic actor with enough property, the scale of their stake in Gurgaon incentivizes them to build roads.  These sorts of projects while helpful do not fully alleviate traffic or transportation issues.  Though one will note that while San Francisco is certainly much better than Gurgaon in terms of transport, it seems that it is either under producing roads and metros OR is failing to properly charge the individual for their social costs (price rationing).  While Gurgaon is failing at providing adequate transportation solutions, it’s not like Major cities have magically eliminated traffic.

Public and Private Goods in Polycentric Private Cites: Conclusions

Well we finally have a better picture of what happens when a city “builds itself”.  Without central ownership or responsibility, there is a huge undersupply of public goods.  How private entities respond to these shortages depends entirely on the nature of the good being undersupplied.  Goods that can be scaled down in size or for which are easily excludable goods are likely to be produced by private entities.  Given that at economies of scale tend to produce advantages of efficiency, the amount of goods produced tend to be more than necessary as compared to centralized production.  Despite this overproduction, downward scalable and easily excludable goods do not to tend to produce the same positive externalities as their public alternatives.  Having three times as many private security guards as next town has public police does necessarily induce feelings of safety (despite objectively similar levels of crime).  There are counter examples to this, but to be more specific when guards exclusively stay within property lines there are no positive externalities (or not enough). Similarly having excess production of private power does not necessarily mean that it is being utilized and sold to other cities.  So the sum total of public underproduction and private overproduction (within property lines) is that on net the average citizen is not better off.  Middle class and above typically live fine lives which meet or exceed the standards of other cities.  Though one will note that the mark of a good city is feeling safe, something that Gurgaon seems to fail at (so do many American cities though).

For non-easily excludable goods, or goods that do not scale down we see mixed results.  The clear result of a lack of centralized “ownership” (whether in the private sense or bureaucratic responsibility sense) is total underproduction of goods.  Gurgaon by comparative standards (juries out on objective) does not produce enough fire safety equipment.  It most certainly doesn’t produce enough public transportation (roads, busses and metros).  For non-excludable and non-downward scalable goods most private companies do not provide alternatives, however some near hegemonic actors do.  The DLF has invested in both producing fire safety equipment, roads and a metro.  Naturally these investments are self-servings but these incentives only emerge when the company has stake which is large enough.  Even when hegemonic actors do step in to provide these goods the results are still far below normal for cities.  This is because their rents being only a portion of a city’s revenue will never justify the level of investment that central ownership can afford.

In Gurgaon life for a wealthy person with a good job at a large corporation is not bad.  Free busing or taxi to work.  There are food courts, air conditioning, back-up electricity and private security at work.  When you get home your air conditioning is still working because your swanky apartment has full back-up generators.  Your apartment also gets fresh water from water tankers on a regular basis.  There are enough security guards around to keep you safe.  If you are living in the slums life isn’t so pretty.  Slums rarely are.  Polycentric private cities don’t necessarily produce a sense of order and security but they do produce a decent life for the productive classes within the bounds of private property.

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5 thoughts on “Private Cities Part 2: Decentralization and Economies of Scale

  1. Pingback: Private Cities Part 2: Decentralization and Economies of Scale | Reaction Times

  2. Fantastic work, Watson. An amazing nuts-n-bolts study in real social science.

    But because it’s not advocacy for some ideology, it lacks the wiz-bang, one weird trick sort of findings that attract eyes (and funding). Where are the correlations? Whither low p-values??

    If only all social science could be so modest. (We’d waste a lot less money on stuff that doesn’t work.)

  3. Pingback: Outside in - Involvements with reality » Blog Archive » Chaos Patch (#80)

  4. Pingback: This Week in Reaction (2015/09/20) | The Reactivity Place

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