PRIVATE CITIES PART 3: CENTRALIZATION AND TRANSACTION COSTS

Transaction Costs

In order to understand why Gurgaon failed to provide centralized or coordinated solutions to utilities and services we will have to examine the role of transaction costs.  First off as we know Gurgaon had no municipal body and was developed primarily by private hegemonic entities.  These entities planned and built both commercial and residential districts which eventually attracted large multinational corporations to invest in the region.  From the results it is clear private developers don’t have many incentives to cooperate.  Further as they are building their developments they begin to create a web of property rights which don’t necessarily align with natural pathways for utilities.  Building a highway a major city requires massive amounts of reshuffling of property rights.  Actors have incentives to hold out due to the knowledge of that the project can’t proceed without the purchase of their property.  Private companies don’t have the advantage of eminent domain either. Even if some company wanted to build a water system which could serve the entire city the negotiations alone would threaten the project.  It is for this reason that infrastructure is much cheaper, and therefore more likely to be built if it is planned and built in advance.

“Compare Gurgaon’s development with that of New York. In 1807, at a time when only the southern tip of Manhattan was urbanized and the population of New York City was just 85,000, the Common Council of the City of New York created a commission that laid out roads and public squares for the entire island (Angel, 2012). The commissioners planned for a sevenfold expansion, an expansion that would not occur for many decades (the population of the planned area would eventually number over two million). When Manhattan did expand, however, public rights of way for streets, sewers, parks, and other urban infrastructure had already been provided for, greatly reducing the cost of expansion. In essence, the Common Council planned the future rules of the game behind a ‘veil of uncertainty’ that gave them stronger incentives to plan for efficiency and the common good. Once the veil is lifted, however, the constitutional moment is lost (Buchanan and Tullock, [1962] 1999).” Lessons from Gurgaon

Is Manhattan perfect? No, but it certainly is doing better than Gurgaon.  A great deal of the difference is due to the orders of magnitude delta in wealth and different fauna.  Yet it is clear though that Manhattan could have easily been hamstrung by poor coordination halting its natural expansion.  As wealthy (per capita) as Gurgaon is even relative to Delhi it cannot post facto plan its development.  Pre-planning lowers transaction costs and creates predictable development.  Predictable development helps coordination and planning.

There is a cost to using the market, the higher the number of actors the higher the cost.  Building highway through a city is not speculation (though it may not be profitable).  It is obvious to everybody that it will implicitly increase property values around the highway.  It is also obvious that any one actor could hold up the entire process by defecting and essentially using blackmail.

As such transaction costs are high once everything is already built.  Once everything is built people have a better idea of the value of the property at stake.  Hold outs become more like and generally there are many, many more actors to negotiate with.  This means as has been the case that without a central authority to coordinate mass changes in property rights, all development is pushed within the bounds of private property.

“Instead of a market in land, there is a series of high transaction-cost bargaining games between sellers, buyers, and the state; each party being provided with plenty of opportunities for threats, holdups, and delays. As a result, individual buyers and sellers tend not to transact and only large firms with the ability to manage the government machinery end up obtaining NACs from the state government. Moreover, obtaining a NAC permission is only a first step.” Lessons from Gurgaon

The only alternative to extended negotiations is political means. Politics comes with its own costs, though it does drastically shrinks the number of actors to deal with.  These costs tend to be barriers to entry into development of large projects.  On the margin this decreases the likelihood private solutions emerging.  Though I must emphasize that without central coordination the incentives of private actors do not align with the commons.  Realistically it is hegemonic actors who both have the incentives in place and means to use the political machine to develop large projects.

“Political transaction costs may also increase with development. After development has begun, multiple layers of local and central governments and regulatory authorities will also have greater power to extract rents, and some may not even want infrastructure development.” Lessons from Gurgaon

The scale of the projects desired by developers has created political feedback loops. Developers support political factions because they smooth over their plans.  Developers won’t cooperate with other companies not only because they are in economic competition but because their political benefactor’s opponents are supporting the other side.  The partisan nature of demotic politics managed to seep into the politically agnostic activity of business.

“Different private developers have different political patronage. DLF is close to Congress and CMO and gets the biggest tenders and benefits. Other developers have allied with local MLAs or with Lok Dal (now in opposition). None of the developers can manage to function without their political patrons, and therefore are on opposing sides.” Lessons from Gurgaon

Even Gurgaon with its single monopolistic corruption is not safe from factionalism.  Given that democracy can bring to power more than one faction, developers have managed to create conflict even when there is only one office to argue over.  If there is one thing to be said about one party states at least everyone knows who to bribe.

We now have a better understanding of some of the reasons why emergent solutions did not emerge in Gurgaon.  Transaction costs both political and financial make post-facto coordination nearly impossible.  I wonder if there is some system which avoided these problems?  That couldn’t be.

As Compared to What?

Naturally we must have a baseline from which to compare Gurgaon to.  While we spent a little time doing comparisons we need to get a sense of how Gurgaon fairs as compared to other Indian cities.  After all now that we have contrasted the systems of government and corruption, we need to understand a little about what sort of society the local fauna produce.

“Though public sewage provision in Gurgaon is appalling and in marked contrast to its gleaming private residences and workplaces, it is actually of above average quality by Indian standards. Consider that 4,861 out of the 5,161 cities and towns in India do not have even a partial sewage network. In Bangalore and Hyderabad, two of India’s other large ‘high-tech’ cities, almost 50 per cent of households do not have sewage connections (Ahluwalia, 2011). “Lessons from Gurgaon

What an average Indian city doesn’t have any waste disposal system.  Granted these aren’t all large cities.  From this we can say that Gurgaon has partial sewage lines so it is at the very least better than average.  Given that it also has private providers of sewage we can say that (outside of environmental and property right issues with sewage dumping) it is once again not bad to be in the middle class and awful to live in a slum.

On a National Urban Sanitation Policy ranking of overall sanitation quality in 2009–2010, Gurgaon ranked 88th out of 423 large Indian cities (Ministry of Urban Development, 2009–2010). Gurgaon had the second-best ranking in the state of Haryana. Most telling, Gurgaon ranks well above its sister city of Faridabad (ranked 240th), a city of comparable size in the same state situated only 41 kilometres from Gurgaon.” Lessons from Gurgaon

When we only look at bigger cities Gurgaon doesn’t do quite as well but it does better in terms of keeping the city clean.  It is in the top 100, but not doing significantly better than most bureaucratic cities.  India is quite a diverse place so it is important to keep in mind that it did well in its province and better than our control.  There could be exogenous factors which are contributing to its lower ranking in sewage treatment.  If that were true it would at best suggest that polycentric private cities don’t rise above their peers with better fundamentals.  This does not mean the situation is acceptable, but that acceptable is a rare quality in the region.

As we will see when we compare Gurgaon to Jamshedpur given that a variety of forms of governance seem to produce outcomes in the same range there is an exogenous variable here.  Take this example below:

“Harris (2013) argues that the country’s struggle to provide water security even just to the 2.6 million residents in the state of Meghalaya, blessed with more rain than almost any other place on the planet, shows that the problems are not all environmental.” Lessons from Gurgaon

“…the problems are not all environmental” is an apt euphemism.  If Rome could build the aqueducts 2000 years ago, then it says something when the locals can’t build enough rain storage.  There seem to currently be hard limits on the performance of India cities regardless of what systems of ownership or governance is in place.  While Meghalaya is a cherry picked example, it is clear that India isn’t currently particular to creating emergent solutions to collective action problems.

 “Moreover, more than 300 million people in India still have no access to electricity at all.” Lessons from Gurgaon

This merely puts a perspective on the base level of industrialization.  This is not 300 million people living in dark cities.  Some of these people probably live in cities but most probably do not.  Part of being able to judge a city’s performance is to compare it to rural areas.  While rural areas are often subsidized they do represent a sort of base expectation for society, as well as demonstrating what solutions will emerge in a relative vacuum.  Keep in mind the solution space is dependent on the relative wealth of the region.

“The situation is much the same for public transportation. According to the Ministry of Urban Development’s Report on Indian Urban Infrastructure and Services, ‘only 20 out of India’s 85 cities with a population of 0.5 million or more in 2009 had a city bus service’ (Ahluwalia, 2011). The report goes on to note that the problem is not only linked to poverty, as India’s rate of public transport is less than half that of other developing economies.” Lessons from Gurgaon

I will note that not all these comparisons are to “large cities”. Only the last comparison is between cities of a least over a half-million people.  It is telling that given a comparison between the metrics if Faridabad (our control) is ranked 240th for sanitation then there are plenty of cities with less than half a million people that have better sanitation.  This would also be true in that of Gurgaon, though being ranked 88th means that there at least 3 cities smaller than half a million with better sanitation and probably more than that.  So once again a lack of centralized economies of scale nets you better than poorly run bureaucracies, a low bar.

Costs per Capita

As per our mice vs. elephants example above we would expect that the average user would bear increased cost for utilities via rent since most apartments have their own electricity, water and sewage.  We can see that despite being located where a suburb of New Delhi should be Gurgaon has slightly higher rent.  Gurgaon has slightly lower utilities, though much higher than Faridabad which has a similar population.  The crime is higher in Gurgaon than either New Delhi or Faridabad.  Finally Gurgaon has a much higher disposable salary than either city despite on average higher costs.  Now it could be that Gurgaon simply is more valuable, it is hard to gauge the reason for price differences.  What is clear though is that it isn’t too much more expensive to afford private utilities over public ones.  That is of course discounting the possibility that the private utilities are not showing up in the generic metrics.

“Private developments charge a premium for the provision of this service and different residential parks advertise that they have 100 per cent backup, or 80 per cent backup…” Lessons from Gurgaon

Again these statistics could be underestimating energy costs though I will note private back up services are also used in New Delhi so it’s not quite an apples to oranges comparison.  Here is some anecdotal evidence of the cost of electricity in Gurgaon.

Many apartment complexes offer 24-hour power back-up, but at an additional cost.  Shilpa Kaul, an executive with a multinational company in Gurgaon told India Ink her electricity bill for June was 5,000 [$75] rupees, of which she paid around [$30] 2,000 rupees just for the power back-up. [Conversions my Own]

http://india.blogs.nytimes.com/2012/07/04/whats-behind-gurgaons-power-problems/?_r=0

Granted that is peak energy usage during summer when air conditioning use is heavy.  That is $75 peak vs. the apparent current $59 average.  It given that the back-up in this case costs $30 per month we can assume that the raw cost for electricity is around $45 for this one person during peak usage.  That implies that either this user is using much less than average or that the averages are accounting for back up costs.  At the very least the averages are somewhat representative.  Below is a table of cross comparisons between Gurgaon, Dehli and Faridabad.

Gurgaon New Delhi Faridabad
Rent 1 Bedroom in City Center $250.76 $ 242.80 $104.20
Average Monthly Disposable Salary (After Tax) $919.28 $553.16 $515.31
Crime Index out of 100 (100 being bad) 71.46 60.31 38.02
Basic (Electricity, Heating, Water, Garbage) for 915 sq ft Apartment $  59.13 $ 66.33 $ 49.26
Population 1,870,463 (2014) 17,862,461 (2014)  1,798,954 (2011)
All prices in USD from August 2015.  Populations from year noted.

Living in a city brings higher living costs. We can see this in the comparison between Faridabad and New Dehli.   With large cities there are diseconomies of scale which increase the social and financial cost to the individual.  These diseconomies of scale are usually mitigated by economies of scale.  As we can see Gurgaon has all of the diseconomies of scale of a large city.  In fact it’s diseconomies of scale, without mitigations of economies of scale, outstrip the costs of a city nearly ten times the size.  One will note that the one metric that Gurgaon wins hands down in is average monthly disposable salary.  Despite being much wealthier than Faridabad, New Delhi doesn’t offer much more disposable salary.  Despite being much smaller Gurgaon well outstrips the disposable income of either our control or New Delhi.

When we compare Gurgaon to the rest of India is at the very least better than average.  Its public infrastructure fails to overcome many of the same problems plagued by other cities and suffers bad diseconomies of scale.  It seems that while polycentric private cities do very well on wealth generation, excludable and downward scalable goods they do not solve issues of the tragedy of the commons any better than bureaucratic cities.  From our sanity check it seems that many of the problems with Gurgaon which seemed immense are at the very least average.  That doesn’t mean they don’t need to be solved, but that in the issues which private polycentric cities fail are not unique to Gurgaon.

Centrally Owned Private Cities

It is time to make understand the incentives and reality of centrally owned private cities (as opposed to the polycentric kind).  Our authors Shruti Rajagopalan and Alexander Tabarrok have chosen two examples of private cities to compare Gurgaon to.  Both are centrally owned private cities which unlike Gurgaon have obtained rights similar to city municipalities.  As far as I know these are the best examples of truly privately owned cities in the world (Singapore being a merely competently run bureaucracy).

“Recall that developers have developed infrastructure within their own property line. If the property line were to be extended so would the infrastructure. In particular, if the government had allowed, or even required, much larger initial purchases of land then entire competitive cities could have been built under the umbrella of a single firm. A single firm seeking to maximize the rents from a large urbanizing area would have an incentive to build infrastructure – such as sewage, water, and electricity – that would cover the entire area under its purview.” Lessons from Gurgaon

Disney

One of the most import advantages single firms have is that they can benefit from the same economies of scale as municipal governments.  This means that unlike Gurgaon they can overcome some of the diseconomies of scale and thereby justify centralization.  Let’s take a look at our first private city.

“Yes. Consider the Reedy Creek Improvement District in Florida, better known as the home of Walt Disney World. In the 1960s, Walt Disney bought up 25,000 acres (approximately 100 square kilometres, a bit smaller than San Francisco) of remote, undeveloped, and uninhabited Florida real estate. The property had no infrastructure, the nearest water and power lines were miles away, and the local government had no resources to build infrastructure. In 1967 the Florida state legislature and the Walt Disney World Company created an innovative form of governance. The legislature created a special taxing district, the Reedy Creek Improvement District (RCID), which in essence ceded governance to the Walt Disney World Company (WDWC)” [Emphasis Mine] Lessons from Gurgaon

So Disney owns and governs a patch of land a little smaller than San Francisco.  What is surprising is that any of this ever got off the ground.  It is incredibly rare for a government to cede so much control over to a private entity, though, theme park sounds a lot better than selling sovereignty.

So how do private centrally owned cities compare to polycentric private cities.  Well really and truly the only difference is scale.  Centrally owned private cities operate much like big version of the many parks in Gurgaon (of course minus the local fauna).  Disney World isn’t necessarily competing with other cities, but even if it was I would doubt it would operate much differently.  The scale of the city, and its profitably, drives the possibility of infrastructure investments at scale.

“The RCID has control over planning, zoning, building codes, water, waste disposal, airports, roads, fire fighting and prevention, utility services, and security. It has built and maintains 215 kilometres of roadway, which brings 250,000 guests to Walt Disney World daily. The district has also built and maintains 107 kilometres of waterways. Fire prevention and emergency medical services for the millions of yearly guests are handled by the RDIC. The district includes its own electricity generation and distribution system, a water treatment facility and recycling centre, a potable water production and distribution system, a natural gas distribution system, public transport systems – buses, ferries, and monorail – that carry millions of passengers a year (both within Disney and between the airport and Disney), a wildlife conservancy area, 40,000 hotel rooms, hundreds of shops and restaurants, and the rides and attractions that have made Disney famous. Disney collects 60,000 tons of waste and 30 tons of aluminium, paper, steel cans, cardboard, and plastic containers for recycling every year. The garbage disposal system is innovative, using underground vacuum tubes to whisk garbage to a central processing station.” [Emphasis Mine] Lessons from Gurgaon

No one is taking a dump in a river in Disney World.  There are no issues with processing garbage.  In fact they have a pneumatic waste disposal system servicing 250,000 people: a literal series of tubes.  This is the only system in the world which has been deployed on this scale.  Other systems in the world serve a park or a neighborhood not a city.  As far as I can find there are no murders in the park and there isn’t much in the way of crime.  Most importantly people seem to feel safe.  The entire infrastructure, which in Gurgaon is distributed between many corporations, in Disney World is provided at scale by unified structures.

“Intuitively, visitors will pay more to visit places that are fun, well-functioning, clean, secure and attractive. Visitors, however, are no different in this respect than residents.” Lessons from Gurgaon

Disney has an incentive to increase the value of their property.  Their profits are dependent on what people are willing to pay for day to day access to their facilities.  Any drop in perceived quality would affect their bottom line.  Because they own the whole property the net effects of the services they provide their customers create a good environment.  They have internalized their positive externalities simply by owning the entire property.  If a single major city were as well run and clean as Disney Land the world would be a very different place.

Types and Nature of Emergent Solutions

If we look back at Gurgaon we can see that semi-wealthy cities won’t necessarily coordinate and provide private security for the commons.  In the United States though, there are private organizations that both centralized and polycentric which contract private security for a commons.  Granted these bodies have some sort of existing enforcement of contract via homeowners associations etc.  These are examples of high trust societies filling in the gaps where public security is inadequate.  Though to be fair, most societies which can coordinate such actions via contract are usually not so dangerous to begin with.  So we can see that the qualities of the local fauna (including wealth) really do determine what sort of solutions emerge.

“Walt Disney World is one of the largest private governments but in the United States there are also hundreds of thousands of typically smaller private governments in the form of homeowner associations, planned communities, condominiums, and co-operatives. In 2012 these private associations governed some 25.9 million housing units and 63.4 million residents (Foundation for Community Association Research, 2012). These governments provide all manner of services from safety and security to snow removal, garbage collection, public transport, and in some cases even medical centres and other infrastructure and services (Nelson, 2005; Agan and Tabarrok, 2005; Beito et al., 2002).” [Emphasis Mine] Lessons from Gurgaon

Another example of private security being contracted is Detroit.  This time the security is not being contracted by the community but by businesses.  Private security in Detroit mostly provides security escorts for inner city shipping.  Mobile *ahem* bandits had begun discouraging shipping through excess pillaging of cigarette trucks etc.  Businesses contracted security to discourage looting both in transit and at the place of business.  This mirrors security in Gurgaon which protects corporate properties and protects goods (employees) in transit through bussing and taxis services, though in Detroit the security is heavily armed.  Out of the goodness of the security company’s heart they also provide free community policing services.  What we see in Detroit is not that private security effective at deterring crime.  It is merely effective at deterring crime from businesses and a subset at that.  At the end of the day private security hasn’t transformed Detroit into anything but the same Detroit but now you can buy cigarettes.  In Detroit the amount of wealth is insufficient to fund effective amounts of public or private security.  Again fauna matters.

“Instead of protecting individuals and particular places, private policing could be used to protect larger neighbourhoods or regions. San Francisco, California, for example, has had a private police force protecting some downtown areas for over 168 years, and private policing has recently become more common in some neighbourhoods in Oakland, California (Stringham, 2009; Kane, 2013). Thousands of homeowner associations in the United States contract with private security firms. Neighbourhood purchase of security, however, requires some collective organization or a more encompassing unitary organization.” Lessons from Gurgaon

So far we’ve looked at three possible results from public undersupply of security.  First we saw private oversupply of security with no protection of commons (Gurgaon).  This was merely average but produced feelings of insecurity.  Then we saw private security protecting the commons adequately (Private Homeowner Associations not the ones in Oakland).  This tends to produce good results with a feeling of security.  Lastly we saw underproduction of private security with protection of the commons (Detroit). This produced below average results.  Of course these results seem to mirror a wholly different pattern, but at the very least we know that each scenario is possible.  Each scenario reflects the tendencies of the native populations.  Some coordinate better than others, some have more capital to spend both publicly and privately and lastly the distribution of ownership reflects the nature of the solutions.

Jamshedpur

Fortunately Walt Disney World isn’t the only example of a private city.  We have another example this time much closer to Gurgaon.  Jamshedpur is a city for year round residents rather than weekly or daily visitors.

 “Jamshedpur is a private township and one of the best-governed cities in India. Jamshedpur was the idea of visionary businessman Jamshetji Nusserwanji Tata…” Lessons from Gurgaon

Again we find that private cities are relatively rare. Again we have a private city founded by a visionary business magnate (notably with the legacy of Tata Motors).  And once again centrally owned private cities tend to plan ahead.  Again we have a visionary who passed away before their vision was complete.

“After years of searching for an ideal location, Jamshedpur was founded (much like Walt Disney World) in a largely uninhabited wilderness area. Tata wrote to his son about designing the town:

Be sure to lay wide streets planted with shady trees, every other of a quick growing variety. Be sure that there is plenty of space for lawns and gardens. Reserve large areas for football, hockey and parks. Earmark areas for Hindu temples, Mohammedan mosques and Christian churches.’” Lessons from Gurgaon

While we can argue about the advantages of wide streets and big lawns we can see that pre-planning can lead to better results for city planning.  If there is an idea of how a city will form and function ahead of time it eases planning and creates predictable expectations.  Planning lowers transaction cost both through central coordination and reduced uncertainty.

“Tata Steel needed infrastructure to attract workers. Jamshedpur prospered as a company town and it is now the largest city (population of 1.3 million) in the state of Jharkhand and the industrial powerhouse of the region. From 1907 to 2004, municipal services including water, sewage, electricity and even education were provided by the Town Division of Tata Steel.” Lessons from Gurgaon

Construction on the city began in 1908 making it one of the oldest private cities.  It is difficult to say it was founded as such in 1908 proper since it was only a company town at first.  It was always intended to be a city proper and so it became one. At what point it truly transitioned from company town to city I don’t know, but the vision of Tata made this possible.  Jamshedpur did not die like so many company towns once industries shifted; it truly blossomed into a full city.  Again the incentive for Tata was always to make the city as pleasant of a place as possible.  Making sure utilities were reliable is a natural extension of this goal.

“In 2003–2004, Jamshedpur Utilities and Services Company Ltd. (hereafter JUSCO), a wholly-owned subsidiary of Tata Steel, was spun off to service the entire Jamshedpur region. Governance in the larger region is complex, but similar in broad outline to that of Disney and Reedy Creek in that Tata employees interact and intertwine with the larger governance structure.” Lessons from Gurgaon

What is amazing is that for nearly a century Tata was able to run utilities as an internal operation of the company. It is promising that they’ve retained control of utilities even as they’ve separated it from their main businesses.  While many have decried monopolies over the years we’ve seen in both our examples that in private cities utilities are not used to soak customers but to enhance the value of their property.  This is a rational extension from the hospitality industry.  The nicer a place is to stay the greater its value. It makes no sense to raise utility prices when they are a fraction of the revenue that can be extracted via taxes, rentals and property values.  In the same way it makes no sense for Disney to charge its customers for their water usage. Utilities for a private city are an amenity and cost that is born in service of their greater business. Despite the clear proficiency of the Tata group at managing utilities there is always pressure for the state to take over operations which compete with itself.  The results of maintaining centralized ownership in Jamshedpur are staggering.

Jamshedpur is widely regarded as having some of the best urban infrastructure in all of India and JUSCO is considered a model provider. Jamshedpur was rated the second best in the country by ORG Marg Nielsen, the worldwide market research firm, on its quality-of-life index in 2008 and in 2010 ranked seventh of 441 cities and towns in India on sanitation and cleanliness by India’s Ministry of Urban Development. Water quality, to give one example, is high enough that water is drinkable from the tap – unusual in India. Total water provision is well above the Indian average.” [Emphasis Mine] Lessons from Gurgaon

Again this is India they are not going to build another New York.  This is still a city run, paid for and designed by Indians.  However what is clear that despite being a relatively small city in India Jamshedpur is doing well.  For comparison in both quality of life and sanitation it is in the top ten in India even while it doesn’t come close to the top ten in size or wealth.  To be blunt it is punching above its weight.

“Power availability in Jamshedpur is 99.42 per cent, the highest in India, and comparable only to Mumbai. In addition to a reliable supply of electricity, Jamshedpur has lower tariffs than other cities (Chattoraj, 2006). The leasehold area of Jamshedpur remains the sole city in India where 100 per cent of the sewage is collected and treated before disposal.” Lessons from Gurgaon

Clearly if reliable power and not dumping poop in the river are your standards for civilization, then the only place to get them in India is a centrally owned private city.  For us to demonstrate the private cities operate better than publicly owned ones must demonstrate not that they produce the best cities in the world, but that they produce the best cities for a given population in a given environment.  Who lives in a city is just as important as how it is run.  Given that Jamshedpur is working within the limitations of Indian biology and capital: producing reliable power and sanitation is relative miracle.

Central vs. Polycentric in India

Gurgaon Jamshedpur
Rent 1 Bedroom in City Center $250.76 $64.36
Average Monthly Disposable Salary (After Tax) $919.28 $166.49
Crime Index out of 100 (100 being bad) 71.46 37.50
Basic (Electricity, Heating, Water, Garbage) for 915 sq ft Apartment $  59.13 $ 34.43
Population 1,870,463 (2014) 1,337,131 (2011)
All prices in USD from September 2015.  Populations from year noted.

Let’s do a quick rundown of the chart above.  As we can see Jamshedpur is considerably cheaper than Gurgaon.  I suspect this is mostly due to exogenous factors (ones that I will note later).  Utilities are notably cheaper as well; this could be from a number of reasons.  Most importantly crime is comparable to Faridabad, again, nothing spectacular here. As we can see that while polycentric ownership tends to exaggerate the diseconomies of scale (crime being one common type) centralized ownership at the very least doesn’t exaggerate them.  To put this in perspective a crime index of 37.50 is below the national average of 46.51 and also way above the lowest for a major city in India of 25.24.   As we can also see disposable income in Jamshedpur is much lower than in Gurgaon.  There’s not a whole lot we can tell from the chart above, prices can diverge for quite a number of reasons.

I don’t have any data for the GDP of Jamshedpur but if we compare the two states’ GDP per capita Haryana (Gurgaon) $1397 and Jharkhand (Jamshedpur) $450, we can see there is a huge discrepancy in wealth.  This is both good and bad news for our case for centrally owned private cities.  First some context, Gurgaon contains offices from almost half of the *American* Fortune 500 companies.  Jamshedpur is mainly an industrial town.  The largest manufacturers are all Tata related (Tata Steel and Tata Motors).  Granted while Tata Motors is no small company ($117.9 billion in assets), it’s not going to compete in wealth generation with 200+ American Fortune 500 Companies not to mention the nearby capital of India.  Also consider the type of industries in each area. IT is more upmarket from manufacturing and will bring with it higher wages (Tata’s headquarters in in Mumbai not Jamshedpur).  Before this turns into an apologia, what I am trying to communicate is that just as good governance will not change the nature of the fauna it also won’t change the economic fundamentals of a region.  What we can note is that despite being poorer Jamshedpur provides better services and infrastructure than Gurgaon.  That should give you a sense of the advantages of centralized private monopolies in capitalizing on advantages of economies of scale.

Conclusions

There are quite a lot of conclusions left to unpack from this wonderful research paper.  I’ve tried my best to compare apples to apples where possible and note the differences when we must compare apples to oranges.  No structure of governance and ownership will magically make its subjects better.  Wealth in and of its self can solve a number of problems with simple brute force. These problems unless centrally coordinated will not produce (sufficient) positive externalities.  Private land holders will produce goods up to the edge of the property line, unless they have the backing of a central power AND it suits their business.  It’s not like public municipalities are building roads for their neighbors either.  Transaction costs will hamper any post-facto development unless there is a central power willing to bend property rights to achieve coordination.  Perception of the commons is more important than reality.  Perception of safety, security and eudemonia are dependent on the quality of experiences within the commons (even if they are indeed privately owned).

In Gurgaon why couldn’t businesses be built as islands in rural areas?  The property would certainly be cheaper.  They already have their own, sewage treatment, power stations, roads and security.  Naturally Ansal Properties and the DLF provide some of the micro-economies of scale for utilities production. Having built one of these types of properties the cost of the 2nd and 3rd etc. will begin to fall.  In addition some of the industries like shipping water and sewage are probably more viable in concentration.  It is cheaper to have water shipped to you if your neighbor also subscribes.  So we see even in the cases where it seems like a bunch of businesses are doing their “own” thing they are really still taking advantages of micro-economies of scale.  The problem again as ever is simply that the scale is too small.  Gurgaon isn’t a city of corporations all doing their own thing.  What Gurgaon is, is a few hegemonic developers operating in a bureaucratic grey zone that have provided attractive space for corporations.  The advantages that the polycentric solution provides have little in fact to do with “competition”.  In fact their advantages have everything to do with the foreign capital and the ways in which hegemonic actors resemble central private cities.  This is not to say competition does not provide benefits but, that competition between centralized private cities is much preferred to competition within polycentric ones (all things being equal).

The fact that the disincentives to sane governance in bureaucracy can be overcome by exceptional individuals, and that only exceptional individuals build private cities seems to indicate that either exceptional individuals are key for great cities or the current environment is discivic.  I suspect that both statements are true.  A more eucivic environment would probably lower the bar for exceptionalism, but exceptional individuals in any environment will produce the majority of the functioning civic structures.

These trends point toward the conclusion that monopolistic control of city planning produces the best results.  One will note a monopoly utility provider might overcharge users.  In contrast if that monopoly utility provider also owns property in the city, he is incentivized to lower his prices.  A dual monopoly needn’t produce the bad incentives as a single monopoly.  Of course it entirely depends on the types of monopolies.  When Jamshedpur builds its own power plants it is not really branching out into a new business per say.   What it is doing it internalizing a transaction from the market into its corporation.  This means that it cannot benefit from specialization of services, but that it will not incur transaction costs associated with the market.  This is common quandary with any business “build or buy”.  There is no one right answer, but we should not regard the internalizing of utilities for a property company as a new or malevolent phenomenon.

Given that in a polycentric setting utilities are usually not coordinated, it is unsurprising that monopoly owners would provide their own utilities.  Their tenants aren’t going to build the big power plant themselves.  Centralized control seems to produce eucivic infrastructure in areas the population has agency and there is the right level and kind of corruption.  Naturally private entities have better incentives.  While bureaucracies only respond opportunities to rent seek, consolidate power and win voters, there is little direct feedback to the ROI for any infrastructure.  Contrast with private monopoly owners who can see the ROI on infrastructure through increased rents and property values.

A city is just like any other business and some will be run better than others.  Having feedback through the market i.e. private ownership makes rational planning of city functions easier. No market force though, can overrule human stupidity and the larger the corporation the more room for error.  The theory of what makes a good city is just as important in a private development as elsewhere. The quality of the owners/bureaucrats will naturally determine the quality of the city.  Without real competition, private cities do not realize the full potential of the market as they are stuck competing in a small pond with their retarded cousins.  Incredible amounts of wealth as found in the largest cities in any state (country) can blunt much of the incompetence of bureaucracy.  And yet smaller private cities can provide services or technology unheard of in larger richer cities simply because of gains in efficiencies of resources distribution.

Are we going to see a rise of private cities any time in the future?  Unlikely, but we can walk away from these examples a little wiser about ownership structures.  There are a bunch of gains being left on the table.  We are living in a world of governance luddites who have discarded ancient advanced technology for the sake of amorphous ideals.  Only now are we rediscovering the possibilities of these lost technologies.

~Fin

Advertisements

6 thoughts on “PRIVATE CITIES PART 3: CENTRALIZATION AND TRANSACTION COSTS

  1. Pingback: PRIVATE CITIES PART 3: CENTRALIZATION AND TRANSACTION COSTS | Reaction Times

  2. Pingback: This Week in Reaction (2015/10/11) | The Reactivity Place

    • Well when I say failed cities I’m not making the strong claim of fail. A truly failed city would be like Detroit. THAT is a failed city. However Gurgaon failed in the same way that California failed. California on the other hand, has repeatedly been unable to solve the tragedy of the commons. Gurgaon has had private actors step in to fill in the gaps, at a cost, for a portion of the population.
      The key differences at least in the private sphere is that private entities can step in to solve problems. IF they are allowed to. However they will be unlikely to produce solutions at scale UNLESS they have enough property to incentivize scaled solutions.
      In public failures often the state fails to provide services and then either hampers or prevents others from stepping in. OR if they don’t hamper others the local population could have low agency and not fix their problems anyway. I guess the key difference is that transitions in failed states are likely to take longer, and be more violent. That being said re-centralization of any kind public or private will increase the chances the the best solutions, based on the qualities of the local fauna, will occur.

      In summary. A failed city and a failed state stem from similar problems and have similar solutions: centralization of ownership (to a point) and better management.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s