In episode 147 of Economics Explored, Kurtis Lockhart, Executive Director of the Charter Cities Institute, tells us about the benefits of charter cities – cities with their own rules or charter, independent of national or subnational governments. Kurtis argues the best way to implement charter cities is via public-private partnerships (PPPs). Learn about the fascinating work the Charter Cities Institute is involved in around the world, particularly in sub-Saharan Africa, with a view to stimulating economic development and lifting millions out of poverty.
You can listen to the episode via the embedded player below or via podcasting apps including Google Podcasts, Apple Podcasts, Spotify, and Stitcher.
Here’s a video clip of Kurtis’s conversation with show host Gene Tunny to give you a flavour of what is covered in the episode.
About this episode’s guest – Kurtis Lockhart
Kurtis Lockhart is Executive Director & Head of Research at the Charter Cities Institute. Kurtis is also a PhD candidate in political science at the University of Oxford. His research examines the effect of institutional reforms on public goods provision with a regional focus on sub-Saharan Africa. At Oxford he has taught both quantitative methods and African politics.
In the field, Kurtis has previously worked as a Research Manager for the International Growth Centre (IGC), for Warc Africa (both in Sierra Leone), and for the ELIMU Impact Evaluation Center in Kenya where he managed the implementation of several randomized control trials across many different sectors (health insurance, rural electrification, tax administration, and legal aid). Kurtis has also completed consulting projects with both Oxford Development Consultancy and with Warc Africa. He holds an MSc in Development Management from the London School of Economics where he graduated top of his class, as well as a BA in Economics and Development Studies (First Class Honors) from McGill University.
Find him on Twitter @kurtislockhart.
Links relevant to the conversation
Podcast Archives – The Future of Development (Charter Cities Institute podcast)
Paul Romer: Why the world needs charter cities
The Charter Cities Institute on Twitter: @CCIdotCity
Transcript: Charter Cities: A Public-Private Partnership (PPP) model w/ Kurtis Lockhart – EP147
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:01
Coming up on Economics Explored…
Kurtis Lockhart 00:05
As an organization, CCI’s vision is to empower new cities with better governance; to lift tens of millions of people out of poverty. So, we’re all about poverty alleviation.
Gene Tunny 00:17
Welcome to the Economics Explored Podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official.
This is episode 147 on Charter Cities. We’re going to learn what Charter cities are exactly, and what progress has been made setting them up. My guest this episode, is Kurtis Lockhart, Executive Director at the Charter Cities Institute, and a PhD candidate at Oxford. One important takeaway for me from this episode was the importance of having a genuine partnership with host countries. So, Charter cities aren’t seen as Neo colonialism.
In the show notes, you can find relevant links and details of how you can get in touch with any questions, comments, or suggestions. Please get in touch and let me know your thoughts on this episode, or have any ideas that you have for future episodes. I’d love to hear from you.
Right on, now for my conversation with Kurtis Lockhart on Charter cities. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it.
Kurtis Lockhart, Executive Director at the Charter Cities Institute, welcome to the program.
Kurtis Lockhart 01:33
Thanks so much, Gene. I’m happy to be here.
Gene Tunny 01:36
It’s great to have you here. I’m keen to learn about what you’ve been up at the institute. As an economist, this is a concept that’s I’ve been fascinated by since, I think it was Paul Romer, famous Economics Professor Nobel Laureate, if I remember correctly; he had this great TED Talk, probably about eight years ago now on Charter cities. I’ll put a link in the show notes.
To begin with, Kurtis, could you just tell us a bit about the Charter Cities Institute, please? Where’s it located, what you’re doing, what your mission is, please?
Kurtis Lockhart 02:17
The Charter Cities Institute is a 501C3. That just means a nonprofit Think Tank and nonprofit research organization. We are headquartered here in Washington, DC. There’s a Zambian office of CCI in Lusaka, that we’re really proud to have opened late last year. That now has three full time staff there, so we’re ramping up quickly there. And I can break down CCIs activities around Charter cities into a few buckets. And they’re all-around building the ecosystem for Charter cities. So, one is around just research, right? So, we provide very nerdy, longer papers on academic jargon and that you’re more e-con inclined audience members would probably resonate with, around why Charter cities are an idea whose time has come. Why they are; we think they’re convincing from a public policy standpoint, to pursue, and why we think that they could be game changers in terms of economic growth, and spurring economic development. So, that’s research, in addition to this longer, more academic oriented pieces, we also, you know, we want to start a movement, and we want people to be involved. You also need to communicate it in other forms, like blogs, like media outlets in more popular press, and exactly like I’m doing with you here today, Gene, on podcasts. So, that’s the research bucket.
The second bucket is around events; we host various events and conferences and summits. One other things that we’re really excited to do, later this fall is co-hosting a conference, a two-day conference with MIT in Boston. They have a sustainable urbanization lab there. And we’re hosting a two-day conference with them, where the first day will be focused on academics; talking about this idea of Charter cities and new city developments as a way to grapple with really rapid urbanization that we’re going to experience as a species over this century. And then the second day, we’ll be less academically inclined and more focused on practitioners and policymakers and new city developers themselves.
So, we’ll go from, the abstract and the academic on day one to the practical and the real world on day two. And I think that’s really necessary in a new space like this with a new novel idea is to get those two silos talking to each other and that’s one of the key things that we see CCI doing in terms of building the ecosystem. So, first bucket – research, second bucket – events.
The third bucket of activities that CCI engages in, is around technical assistance and partnerships. So, engaging in and providing advisory to new city projects on the ground to get these things built in thriving new Charter cities out there in the real world.
Gene Tunny 05:24
Great. I mean, I’m keen to learn about new cities being built. And because this Charter cities idea, it’s designed to stimulate economic development to improve outcomes for people out there in the real world. So, you’re keen to learn what’s going on there? Would you be able to explain first, what is a Charter city? How do you conceptualize it? How would you describe it, Kurtis?
Kurtis Lockhart 05:48
Our simple definition of a Charter city is new city with new rules. And there are two pieces of that: the city component, which is the built environment, or the urban space, and the rules, which economists, have a fancy jargon word; institutions for rules. And economists of all stripes pretty much come to agree that the fundamental determinant of long run economic growth, long run economic development, is institutions and governance. And the issue is, across a lot of countries, low-income countries, lower middle-income countries in the Global South, you have poor governance and poor institutions. And they’re really hard to change. So, we see Charter cities as a mechanism to bring about deep reforms needed in governance and institutions that can then lead to increases in long run economic growth, which is, we think, the major way to lift masses of humanity, from poverty, to prosperity, in its short amount of time as possible. And that’s the main reason; I can go more into why we think that Charter cities are a great mechanism to bring about that institutional reform and institutional transition, if you want. But I’ll pause there.
Gene Tunny 07:17
So just first, why is it called a Charter city? The Charter, is there an actual charter that you give to the city? Is that the idea there’s a document or a set of principles, a set of rules? Is that the idea?
Kurtis Lockhart 07:32
Yes. So, I mean, it comes from history, where new jurisdictions being settled, were granted charters; and basically charter is a standing for the new rules that apply in this new jurisdiction. And it’s a stand-in for institutions. That’s what we mean by charter. And then city, I always break it down by those two words, because that’s what we’re all about at CCI is cities, which is about the physical, geographic space, and urban planning, and land use regulation, and how the city is kind of planned, it is super important. Transportation, urban infrastructure, the built environment. And then on the other hand, the charter, right? That’s what you could call the soft infrastructure of the city, which is the rules that govern different policy domains in a city. Both of the soft and hard infrastructure need to be right, in order for a city to thrive.
Gene Tunny 08:39
So, it’s a new city with its own rules. So therefore, you either need to carve out, or you need to carve out territory from an existing country. I mean, you’ve got to; most of the world’s is going to be covered by sovereign nations, isn’t it? Like, how does this work? I mean, you have to get the agreement of a government, is that right to get a new bit of land and have your own rules? Is that correct?
Kurtis Lockhart 09:09
Yeah. So, this is a great time to bring in Paul Romer, who you alluded to in the first question. So he had a TED Talk back in 2009, that you talked about, where he coined this term Charter cities and defined this concept to begin with, or at least early versions of the concept. And his model, Romer’s model of Charter cities is what we can call the foreign guarantor model to Charter cities where he advocated for a high income, well governed country like Canada to come into a low income poorly governed country like Honduras, and Honduras would cede a large city scale chunk of land to Canada. Canada would then effectively you know, import its good institution. And in that delimited chunk of land that it’s been ceded, and because of that institutional shift towards good institutions, and being administered by Canadians; I’m Canadian, so I’m kind of, patting myself on the back right now, then you would therefore, get economic activity, you’d attract investment, you’d get business formation. And those things would spur sustained rates of growth moving forward, and you get all these good outcomes.
So that was kind of Romer’s foreign guarantor model – a candidate coming into Honduras. As you’ve brought up now, that idea was seen as controversial by a lot of people because it has implications for sovereignty, right. A lot of Hondurans are going to say, wait a second, you’re telling me that we don’t have sovereign control over all of our Honduran territory, and we’re ceding that sovereignty to foreigners? Like no, I did not agree to this.
Well, I think that critique, that sort of, Neo colonialism critique is a bit misguided in certain ways, nonetheless, it’s real. And it rubbed a lot of people the wrong way and was seen as controversial. So Romer tried to implement this model in Honduras, and in Madagascar, and it didn’t work out so well, and then he sort of, receded from this charter cities movement. So, the Charter Cities Institutes, CCIs model is different from Romer’s, We advocate for Public Private Partnership, a PPP between a host country and an urban developer. And ideally, it’s an urban developer from that host country so that they know the context, they have appropriate connections and whatnot. And the reason we think that’s better is basically two reasons:
One is it sidesteps all of these issues of sovereignty that are implicit in Romer’s model, right. This space of land that the developer is going to build is not at all, a separate entity. It is part of the sovereign jurisdiction of the country, subject to its constitution, subject to its criminal law, subject to its international treaties. The only other things that it has kind of special control over is commercial law and everything else other than those three things; constitution, criminal law, and international treaties.
So, number one, it sidesteps these issues of sovereignty implicit in Romer’s model. Number two, we think that this PPP model does a much better job aligning incentives between the urban developer on the one hand, and both the host government and the population, the city residents on the other. The reason is because, urban developers make their profit from the appreciation in land values over time, right? And so that’s their main incentive; is to maximize land values. How do you maximize land values? Well, you attract as many people, as many residents and businesses to your city as humanly possible. How do you do that? You create a livable city, you govern that city well, you provide urban services and urban amenities to the businesses and residents of that city and you will attract more residents and businesses, and therefore see land values increased.
So, we think that aligning incentives is done much better under this PPP model than the foreign guarantor model. It’s a lot sort of, analogous to, you could say, the way a shopping mall is set up. I think that’s a good model in a lot of people’s heads, maybe your listeners. You have a shopping mall, where there’s the mall owner, and then they rent out storefronts, or store space to various shops. And the shopping mall owner provides public goods like lighting, garbage removal, and cleaning and security to the public space within the mall. And in exchange, they get rents from the various stores within the mall to the extent that it then therefore attracts foot traffic to those various stores, and therefore the force base within that mall increases. That benefits the shopping mall owner. So, it’s a very kind of similar model and you can use that as an analogous thing to the way it aligns incentives.
Gene Tunny 14:50
Right. You mentioned that Paul Romer had; there were some practical examples of this that he was involved in. He was advising them, was he? And they just didn’t work out. Do you know why they didn’t work out? What were the problems that occurred?
Kurtis Lockhart 15:07
His full involvement is still unclear; the extent to which was involved. I know that the Hondurans in particular saw the Ted Talk that both you and I have alluded, and I think he was the adviser to the President, really resonated with him. And so, he called Paul Romer and got the Presidential in support and they said, let’s go with these things. And there were a few, several iterations that I don’t want to go into all the history. But eventually, this new Charter cities law, you could say was passed called the ZEDE law, which basically stands for the Zone for Economic Development and Employment. And Romer, as part of this law was placed on the transparency commission. So, there was like an oversight board, that would make sure there’s not a lot of, abuse going on with these zones and the developers kind of, given a lot of powers within these special jurisdictions, these ZEDEs,
The issue then became that potential developers or deals started to arise between folks that wanted to govern these ZEDEs and the government that were being held without the oversight or input from the transparency commission. So, Paul Romer said, okay, I’m done with this, you’re kind of, not at all going about this in a transparent way that I had signed up for. So, he left the ZEDE project.
There have since been a few that he’s started. I think there are three in operation right now, including well known one called Prospera, on the Island of Roatán.
Sorry, Roatán; where’s that? Sorry.
Roatán is an Honduran Island. Those were the first kind of, ZEDEs under this law, a socialist was elected president last fall in Honduras. And she was elected with one of her platform planks being the abolishment of this deadly law. The Honduran Congress just passed that abrogation earlier this year. And so that’s kind of a huge blow to this ZEDE regime.
I think the three ZEDEs that are currently in place, that were passed before that law came in or was abolished, aren’t going to be abolished, they still have the ability to function. But obviously, if you’re an investor, and you see a president in place, that is hell bent against this concept of a ZEDE, that’s going to likely give you pause about getting involved. So, it’s great for the space. But I think what the Honduran example goes to show you is that you need legitimacy. And you need buying from the local population. And I think the way that the ZEDE law was passed in Honduras in the early days, did not at all, have that legitimacy necessary for long term success.
Gene Tunny 18:19
Right. Did you mention Madagascar as well? I can have a look into it. It’s just fascinating, I wasn’t aware that that was happening. And I mean, if I can get Paul Romer, on the show in the future, or, I’d love to chat with him about that. But you did mention Madagascar, was that right?
Kurtis Lockhart 18:38
Yeah, Madagascar happen. I think Paul Romer met with the president whose name is long, and so I’m not even going to attempt to say it, but they had a conversation and the president, I think was on board. But for many other reasons in addition to this one, what was happening is I think a South Korean company was going to come in and get a large tract of land, and the local population didn’t like that idea. So, a kind of protests broke out. Again, this is somewhat related to the Romer presidential conversation, but there were other factors involved that spurred the protests and riots. So the reform didn’t end up going through. Both attempts, well-attempted and in the Honduran case, it did get implemented, t just hasn’t been very successful. They didn’t end up having an enduring impact and Romer has since receded.
Gene Tunny 19:39
I was interested in that point you made about the new; there was a new government in Honduras and it’s a socialist government. They’re not going to like a Charter city. If you think about it, because is the idea of a Charter city, it’s going to have more liberal or more free market institutions, lower taxes, lower tariffs, more business friendly regulations, is that the idea? That they want to try and replicate what Hong Kong was in a few decades ago. I mean, Hong Kong is still a prosperous place. But there’s concerns about the, the administration or the influence of Beijing in Hong Kong now. Is that the idea that it’s; you want to have a free market type of city state? Is that the idea?
Kurtis Lockhart 20:34
By our simple definition of Charter city being new cities with new rules, that’s a pretty politically agnostic definition, right. So, if you think about it, that could be taken on either end of the spectrum and ran with. I think the model that CCI advocates for is more in line with what you’ve been saying. So, liberalizing and introducing market-oriented reforms, just because if you look at history and how well you know Hong Kong has done and Zen Jen has done and Singapore has done and Dubai has done when they’ve liberalized, that would seem to indicate that that’s a good idea to do. And then you contrast that with reforms on the other end of the spectrum and how those worked out. And I think that effective option is pretty clear from history.
But that’s not to say that we have been approached by, for example, indigenous groups that are interested in this model of Charter cities, because they want as a group, and want to push for an advocate for more decentralized, and devolved authority and autonomy over the jurisdiction that their group resides in. And they see this Charter cities model as a potential way to do that. So, I wouldn’t label that as kind of libertarian or free market fundamentalism in any way; that’s more just an indigenous group seeking some more ability to control their own fates. And I think this is an interesting avenue of the Charter cities movement is around this kind of more traditional local groups that are pushing for more reforms or more powers over their areas.
One other things that; I’m from Vancouver So, I’ve been following this. I guess, developments around this section of Vancouver that’s reserved, a first nation’s reserve, it’s called the Squamish nation. And they own some very, the reserves on some very prime real estate within Vancouver, and just as other in thriving cities elsewhere in Vancouver, real estate prices are astronomically high. And so, what this Squamish nation decided to do was partner itself with an urban developer and say, hey, instead of letting this very pricy and scarce, urban land lay vacant, and just dedicating it to a park or something, let’s build some skyscrapers. Let’s build some housing and apartments for Vancouverites. We have an equity stake in this development. We partner with this urban developer that they bring in the technical expertise and the financing to get the project built. The urban developer benefits, we benefit as the Squamish nation, and each of our members can benefit and was voted positively, overwhelmingly by the Squamish nation. And now, this indigenous group is going to benefit immensely from an urban development project. It’s also going to provide a lot of housing that’s very sorely needed in the city of Vancouver.
So, there’s win-win situations. And I think the model of Charter cities can span the gamut between these helpful models that indigenous groups can like as they want more devolved authority, all the way to more libertarian like sea steading models or something like this have in the past.
Gene Tunny 24:10
I remember listening to an episode of, I think it was Ross Roberts econ talk show about see steady, it just sounded like something that couldn’t work. I couldn’t see how that would be feasible. You just have to give up too much of your lifestyle. I mean, like I often complain about regulations where I live here in in Brisbane in Australia, but I do recognize that there are a lot of good things about living in Brisbane and I couldn’t imagine as much as I am relatively free market and I do have some sympathy for libertarian views. I couldn’t imagine going on to; I don’t know what would you go on to, an oil rig or something or you’d have to buy an island somewhere, I suppose. But I mean the amount of investment you need to get a critical massive population, don’t you? I mean, they’re all these things that you’d have to get right.
But I guess we can talk about your Charter city model in a minute and how that’s going to work and how it’s going to grow and develop.
I want to ask you about this concept of institutions. So, you’re talking about institutions and how important they are to economic development, and then they facilitate trade, and they facilitate innovation. Now, there was a great book about, I don’t know, maybe a decade or so ago, why nations fail, and that really emphasized the importance of institutions. And the problem is in some many developing economies, the ones that can’t get beyond that, per capita income of a few or a few thousand US dollars a year or So, they’re trapped because those institutions are so bad, and they’ve got kleptocrats in charge, and they’ve got marketing boards, which are extracting surplus, and you’ve got all of these really bad institutions. I mean, Reimer gave an example of regulations that mean that electricity companies won’t, they’re not covering a lot of the population. So that’s where you really want the Charter cities, is it in developing economies, particularly in Sub Saharan Africa? Is that where your focus is?
Kurtis Lockhart 26:35
Yeah, I would say that’s accurate. As an organization, CCIs vision is to empower new cities with better governance to lift 10s of millions of people out of poverty. So, we’re all about poverty alleviation. And so our focus does tend to be on those places in low and lower middle income countries, because that’s where most of the poverty lies, almost teleologically. And so that’s where we focus our efforts. And, like, I want to go into the mechanism of institutional change that sort of our theory of change, because you kind of alluded to that we’re talking about kleptocracy and marquee awards and sort of incumbents that kind of dominate the current rule set in the current system. And I think this is really important.
Some of your listeners may be familiar with, not just Why Nations Fail, which is a fantastic book on institutions, but also a book called The Rise and Decline of Nations by Mancur Olson. And he writes about this phenomenon called, The Logic of Collective action. And in essence, you get collective action problems when you have concentrated benefits and dispersed costs. So, what do I need? Let me unpack that. I’ll give an example. So, the main example given in the book and in the States is around sugar tariffs. So, you have these Florida sugar farmers that because of this sugar tariff in the States, sugar therefore, in the US is a lot higher per unit than elsewhere. That tariff puts a lot of money and profits in the pockets of these sugar farmers. Because there are a few farmers, they’re really incentivized and mobilized to go lobby their politicians to keep this sugar tariff in place and not abolish it.
On the flip side, consumers of sugar like you and me that maybe go to the store to buy a bag of sugar once every year for like a few bucks, we are maybe going to have to pay 50 cents extra because of this tariff. And while the group of consumers that are impacted by that 50 cents is huge, much larger than the number of farmers, because that impact is so small at 50 cents is so sort, of trivial. We, I mean you are not going to get all mobilized and angry and co-lobbying our politicians to abolish this tariff. That is completely the opposite for the farmer, they are going to be mobilized.
And so, you get this bad equilibrium for these rules where despite the tariff being suboptimal for society as a whole, it is continued because of this dynamic of the logic of collective action. And you can apply this example with the sugar tariffs to institutions writ large. There are incumbent political elites that are currently benefiting from the status quo institutions, right. So, they have every incentive to see the status quo institutions continued and undermine attempts to reform them, despite reforms, potentially bringing these institutions into a much better and more optimal equilibrium. And because, on the flip side, everyone maybe, has to deal in that place with those institutions, maybe as to kind of, give a bribe once every three months or so. We’re not hugely, hugely impacted in our day to day lives, or perhaps we have other worries to worry about. We are less mobilized as a group of citizenry to push for institutional change on a national level, than the small group of political elites who currently benefit from the status quo are at mobilizing to keep those subnational suboptimal institutions in place.
So, we see Charter cities as a way to, instead of attempting to pass national level reforms, where you’re going to get and threaten all of these political elites interests, and therefore those elites are going to try and stymie and undermine reforms. We see Charter cities as a way to circumvent those interests in elites by situating themselves in a delimited, small geographic space. Ideally, greenfield space where it’s sparsely populated, so you’re not bumping up against any of these incumbent elites interests, and therefore, these spaces can get a lot deeper institutional reforms than otherwise possible. And so that’s the mechanism and theory of change, and why we think Charter cities are this great policy tool to get very deep and needed institutional reforms.
Gene Tunny 31:28
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 32:02
Now back to the show.
So, could you now tell us please, Kurtis, where your institute is involved in new Charter cities? Like where are we talking about? Where will these cities be? Where are they in the development cycle? What’s happening? I’d love to know.
Kurtis Lockhart 32:22
So, we are an organization CCI, we were founded in 2017. So, we’re in year five, that’s in the think-tank world, we’re still a baby. And, it does take a long time to build driving new cities. So we’re talking on the timeline of decades, not years.
We are involved in several projects. They are nascent, so I’ll go over some of them. One of them is in Lusaka, Zambia, just outside Lusaka, Zambia, it’s called Nkwashi. It’s a Charter city, a new city development that’s aimed at 100,000 residents. And its anchor tenant is anchored around a university. So, what the model is, is to have this stem University of science, technology, engineering, math, attract really bright smart Zambians to this university, train them up in STEM subjects, and then connects those graduates that STEM graduates with remote work in either Europe or the states. And that does two things. I mean, you’re going to earn more being employed by these European and American tech companies – number one.
Point number two, these graduates are also going to earn in American dollars or euros and that allows them also to hedge against the volatility of the Zambian kwacha, which is really tied to copper price, copper price fluctuations, which can be it can experience really wide swings. And so that’s the model for Nkwashi. Nkwashi attracted its first few residents; I think it’s a few years in operation, the groundwork foundations have been laid for the building of the university. There’s also a feeder school, a high school that will attempt to feed students into the university called Explore Academy; that’s I Nkwashi.
The other ones worth mentioning are a Talent city, in Nigeria. The founder of Talent city, his name is Iyinoluwa Aboyeji. He is one of the most successful Nigerian tech founders in the country. He’s co-founder of Andela and Flutterwave, two or the more successful African tech startups and unicorns. So, he wants to give back to the Nigerian tech community that’s growing really rapidly. But he sees the biggest constraint on that tech ecosystem in Nigeria as tech talent. And so, he wants to establish this space, this jurisdiction with new rules that especially allow for freedom around things like crypto and more innovative technologies, and provide very reliable digital infrastructure, and power and electricity, and all those things that you need in order to function as a tech company in the modern world. So that’s talent city.
Another one in Nigeria is called Enyimba Economic city. It’s in the south west, not on the outside of Lagos like Talent city, but in a place called Abia State, and that’s in the Delta region. And so those familiar with Nigeria know that the Delta region is sort of the oil and gas sector, oil and gas region of Nigeria. This city is aiming for 1.5 million residents, it would in phase one, be oriented around logistics and processing around the O&G sector in the Delta region. But it envisions and phase two and phase three, to expand beyond that focus on logistics and O&G processing, to having a university and a world class research hospital, because some of the social sector provisions in the south and southeast of Nigeria are just really, really lacking. And so that’s probably our biggest and most ambitious, single project.
The other, and this is the most recent project that we’re engaged with is in Malawi. And we’re really, really excited. So, we’ve just signed an MOU with the National Planning Commission in Malawi, who have spent the last three years coming up with these secondary cities plan. This plan is really and this has happening across the continent. It’s aimed to address this challenge across a lot of African countries of really rapid urbanization. As it stands right now today, Malawi, is actually among the least urbanized countries on planet Earth. It’s about 17% urbanized. But what we’re going to see in the next 30 years, 28 years to 2050 is Malawi’s urban population is going to more than triple. And so very kudos and plaudits to the National Planning Commission, they see this trend and say, okay, well, we need to get our ducks in a row, and plan for this really, really rapid urbanization in advance. So, the secondary cities plan that they’ve created, and they launched on May 31, I spoke at the launch, it lays out eight new secondary cities, and lays out the spatial development plan for those eight cities.
Malawi is a North South country. So, the cities are spread out from the north, all the way down to the south. What we are going to do as CCI, after we’ve signed this MOU, and we’re now an official implementation partner of this secondary cities plan. We’re in the process with the National Planning Commission, the Ministry of local government, the Ministry of lands, the president’s office, writing up the special jurisdiction laws that are going to apply to these eight secondary cities across Malawi.
So, this, to me is one of the most exciting projects because we have, government buying across a slew of needed ministries, including the President. There’s already been a lot of resources and thought put into this over a sustained period of time. So, you have a demonstration effect that there is that political buying. The plan is already in place for these eight secondary cities. And we’re getting in at the ground floor to shape the legal jurisdiction around those eight cities. So, this is a huge opportunity for us. And we’re really excited about what we’re seeing in Malawi.
Gene Tunny 38:56
Yeah, that’s fantastic. Are you involved in getting any of the financing or any funding from say, World bank or other donors? Do they get any funding from those organizations? You mentioned PPP, Public Private Partnerships? So, there’s an infrastructure developer, or what did you call it? An urban developer or a development company that develops it and they’ve got some deal with the government that the government will not pay them for providing infrastructure? How does that work, Kurtis?
Kurtis Lockhart 39:30
One of the roles that we will play as implementation partner is to help facilitate financing. This is one of the constraints I think most African cities and towns face is this ability to adequately finance urban expansion, right. It’s the most rapidly urbanizing place on planet Earth. In Africa, the estimate is that almost a billion people are going to move into their cities over the next 30 years. So this is a huge transformation. Yet, African towns and cities are not able to issue municipal bonds to the same level that historically, European cities and American cities were able to tap in order to fund and finance urban infrastructure.
So we see these kinds of municipal bond markets in Africa are either kind of, really nascent, or more commonly just nonexistent. So we want to help number one, come up with a de risk model of municipal bonds. And number two, help fill that financing gap by not just kind of public sector debt in the bond market, but also deifies. Like you mentioned the World Bank; the IFC is a World Bank arm that invests in privates. I know, the Millennium Challenge Corporation was also at the launch of the secondary cities plan in Malawi on May 31. And they’re involved in work in Malawi. So, they would be great partners, because they focus on infrastructure growth and institutions.
You have the municipal bonds that need to be figured out, that’s on Malawi, you have the DFIs that will be involved in financing as well. And then the hope is that once those two financial pillars are in place, that a third financial pillar will be then convinced that this is a good idea, and that’s the private sector. Typically, in these new emerging frontier markets, it’s the government that needs to get its house in order, and then the DFIs that come in ahead of the private sector, and that’s a signal to the private sector that okay, this is now a place where I can do business and start offering different financial instruments to.
Gene Tunny 41:47
Can I just clarify Kurtis DFI, do you mean Development Finance Institutions, the World Bank, Asian Development Bank, etc? Is that right?
Kurtis Lockhart 41:58
Yeah, that’s exactly right.
Gene Tunny 41:59
That’s okay. I was just wondering, because I used to work in the Treasury in Canberra, we call them IFIs. I think International Finance Institutions, or I can’t remember. I remember there was some sort of abbreviation or acronym…IFIs.
Kurtis Lockhart 42:12
IFIs is more fun than DFIs. So, I’m happy to go by if IFIs.
Gene Tunny 42:18
Right oh, yeah. Sorry, I interrupted you there. We’re talking you’re going to help sort of, sort out financing and all that. One thing I’m wondering is about the deal or the relationship with the host country? Because I mean, one of the; and you would have thought about this. I know, and this is why I’m interested in your thoughts on it. How do you constrain or tie the hands of the host country of the host government? Because I mean, one of the risks is that you have this thriving Charter city, and the economy is going gangbusters. And, everyone’s wanting to move into it. And if you’ve got lower taxes, or it’s running itself, the host country, their finance ministry, they’re going to look enviously on this little Charter city, aren’t they? And, I mean, they’ll want to get a piece of the action. So, isn’t there a risk there that they could then impose? They could ramp up taxes, they could try and, take, extract some money out of the Charter city, and that threatens the viability of it. How do you deal with that situation?
Kurtis Lockhart 43:32
You hit on what I think of as probably the biggest risks to Charter city projects. And that’s just the fact that there’s a political risk. And, the urban developer is going to enter into a public private partnership in a point in time with a particular political regime. And because these city projects are decade’s long projects, the project is going to span multiple political regimes. And so how do you as the developer know that the political regime that’s agreeing to the public private partnership today, is going to also agree to that same public private ship, public private partnership tomorrow, when that political regime has changed or altered? How do you know that there is a credible commitment? So that risk of the government’s killing the birds that laid the golden egg is ever present.
We’ve thought of this, and there are several ways that we can go about trying to mitigate that risk, that political risk of expropriation, two of the simplest, I think, are just about, again, aligning incentives. One, I think, within that public private partnership, there should be a revenue sharing agreement that’s embedded. So, every year the developer within that jurisdiction collects user fees, they collect taxes, they collect land leases, right land lease rents, from those within that jurisdiction. And I think a proportion or percentage of those funds should be remitted to the host country so that every year, the country gains something in their coffers from the success of that Charter city. Therefore, it has less of an incentive to, see that pot of money that it gains every year, destroyed.
Another way to do exactly that is by giving an equity stake in the development company, to the host country, right. So, if the urban developer succeeds immensely, as has happened in kind of Sangen, and Singapore, and Hong Kong and Dubai, and the city grows, 5, 10%, on average year on year, then the post country also reaps huge rewards from that success. So those are two pretty simple ways to align financial incentives.
Another simple way is that there are organizations that do offer political risk insurance MIGA, M-I-G-A, I forget what the acronym actually stands for, but they are the entity under the World Bank Group of organizations that offers political risk insurance. A few other things that could be attractive to help mitigate this risk is floating the development company and publicly trading the development company. So, then you have big sort of institutional investors within that host country, like pension funds, for example, invested in the success of this Charter city, and whether we like it or not sort of business elites, and political elites kind of talk with each other and influence each other. And if the political elites are threatening to expropriate the Charter city, and that’s going to have adverse consequences for the pension fund folks. They’re going to raise a stink and say, hey, don’t do that, that’s going to hit our pocketbooks, and we might not support you in the next election. And so that could also be some cover.
Another way, and I think this is this is probably really effective, is to include sort of an objective, international organization in the project. You mentioned the World Bank. So, by including the World Bank in a Charter city project, whether that’s alone, or I don’t know, if they would do equity investments in a private company, that would more be IFC, which is their private arm. But including them in the project would mean that if the political elites decide to expropriate or jeopardize or threatened interfere with that Charter cities project, and the World Bank is involved, that means they’re also jeopardizing a bunch of other loans and projects that the World Bank is investing in their country. And they’re also jeopardizing their access to concessionary loans and finance that the World Bank offers their country. So, they would not want to, ideally, they would not want to do that.
So, there’s a bunch of ways to lessen the risk, to de risk, but you cannot fully get rid of that risk of political expropriation, just because, again, unlike Romer, our model doesn’t create a new sovereign, right? These are not sovereign entities, they are subject to the constitution, and criminal law and international treaties of the host country. And so that’s sort of an ever-present list. But again, I just listed off a bunch of ways you can help de risk and mitigate that risk such that it’s, it’s less, much less likely to occur.
Gene Tunny 49:01
I just wanted to ask, those examples you gave of how you can de-risk. Have they been any of those been applied? Or is that just your ideas of how you can de-risk?
Kurtis Lockhart 49:12
I know revenue sharing agreements are part of it. And I know for example, Enyimba Economic city, which I mentioned in Nigeria, both the state government, located in Abia state, as well as the federal government in Nigeria, have equity stakes in the Enyimba development company. And so that risk mitigation technique has been implemented there. There’s also a revenue sharing agreement embedded in the PPP.
When it comes to others that I recommended; it’s not a Charter cities project, but it was a pipeline project in Cameroon. And it was, oil was discovered in Cameroon and Exxon Mobil at the time. I think this is the late 90s or the early 2000s. Exxon Mobil saw an opportunity there to operate in the country. But there had been some protests in the past about the oil sector. So, ExxonMobil was worried about, engaging in all this upfront investment and investing all this capital only to have these protests breakout and then to have to, leave the country. So, they wanted reassurances, they wanted a credible commitment on the part of Cameroon and the Cameroonian government, that that wouldn’t happen. And that also the sort of funds, the revenues derived from the pipeline project would not be expropriated by the Cameroonian government. So, it is what both the Cameroonian government in negotiation with ExxonMobil agreed to, was there would be this escrow fund, that the revenues flowing from the pipeline project went to, and there would be a council approving disbursements from that escrow fund. And some of the spots on that council would be appointed by Exxon, some of the spots on that council would be appointed by Cameroon, but that basically, the tie breaking vote on that council would be the World Bank. It was seen as sort of legitimate from both sides from both Exxon and in the Cameroonian government. Any sort of dispute or kind of corruption or revenue issue was sort of mitigated by having the World Bank involved. Again, for this reason that I brought up earlier that the World Bank is involved in a lot of these low and lower middle-income countries in terms of a bunch of infrastructure projects, or health projects, or education projects, and gives loans of various sizes and numbers to a bunch of really important political projects across the country. If they’re involved, the host government is much less likely to interfere with and expropriate the project than otherwise would be the case. So, I use that example, as kind of illustrative of that, of that power of that risk mitigation technique.
Gene Tunny 52:15
Right. Now, I do want to just ask about special economic zones. This idea of a Charter city, this is broader than a Special Economic Zone, S-E-Z or SEZ because you’ve got people living there, haven’t you? You want to actually establish a city? It’s not just a sort of an export processing zone or whatever it says is, is that right?
Kurtis Lockhart 52:40
Yeah. So, there are a few main differences between a special economic zone and a Charter city. They’re kind of analogous in that both are delimited jurisdictions with different rules, right. But there are a few main differences that we think make Charter cities much more impactful than SEZs. One is just size, right? So Charter cities are cities scale, SEZs are usually much smaller and more narrow. And that just affects how many people and how many businesses can agglomerate within a particular area. Both you and I, being economics nerds, we know the importance of agglomeration economies, and this is why cities are fantastic, because of all these agglomeration economies. So, that’s number one is size.
Number two is SEZs tend to be focused on a single or one or two different sectors or industries. So, you have textile or manufacturing, or tech hubs, those types of zones that have one sector that they really want to focus on. Whereas, Charter cities are mixed use and multisector. They’re cities, right. There’s not just an industrial component, there’s also a commercial component, and very importantly, residential component.
A lot of zones and industrial parks don’t have people living there, right? And again, that impacts this urban agglomeration potential, and we really, really want conglomeration economies to take off. So, the mixed use so multisector and the residential component are super key differentiator.
The third difference is around governance and the rule set. SEZ legislation, when it’s passed, is sort of, you could say setting stone; my whole thing is humility. So, we’re not going to get the rule set exactly perfectly right at the beginning of these things. And the zone operator or administrator is going to figure out that, okay, hey, we didn’t get this law that we wrote, five years ago, completely right. There are a few clauses that are causing us a lot of problems that we need to change pretty quickly, otherwise, these businesses aren’t going to like it. When that happens with SEZs, they have to go to higher tiers of government or Parliament even and get Parliament to pass an amendment or pass a new SEZ law. As you can imagine, that takes a lot of time and slows the reform process down immensely. And, usually the reform doesn’t even happen at all. And so that hurts business dynamism and the ultimate success of those zones. Whereas, Charter cities, we devolve that ability to change the rules over time, down to the city administrator and the city operator. And so instead of having to do that slow process of every time they need to change, they have to go up to higher tiers of government, they can make those changes really quick on the fly as needed within the Charter city. So, those are the four main differences.
Gene Tunny 55:44
Good one. Okay. Just finally, I’ll try and sneak this in. You’re doing a PhD at Oxford. Are you nearly finished? And is it on Charter cities?
Kurtis Lockhart 55:51
Yes, I have a year left. I mean, I’m knocking on wood right now. I am doing a Doctorate in Political Science at Oxford. It’s focused on political decentralization. So, a couple of the articles will be around New City developments and Charter cities, and the potential of these for economic growth and prosperity around the globe. So, that work really aligns with the work that CCI is dedicated to.
Gene Tunny 56:18
Brilliant. Okay, Kurtis has been fabulous. I’ve really enjoyed and I’ve been blown away learning about what you’re doing. And the sheer potential of Charter cities is something that excites me. So terrific work, I’ll put links to your institute and to your social media in the show notes. I really enjoyed the conversation. If there’s anything you want to say to wrap up, please do otherwise. Yeah. I’ve really enjoyed it. And thanks so much.
Kurtis Lockhart 56:50
Yeah, thanks so much, Jean. I will just say if people are hearing this, and they want to learn more and get involved in the Charter cities movement, we are starting and has started a coalition this year called the next 50 Cities Coalition. So, it’s really easy to sign up, you can sign up as an organization, or even an individual, and you’ll get notifications of upcoming events and conferences, you’ll get newsletters and all that stuff. So, I’d encourage you to go to our website, Chartercitiesinstitute.org. And it’s backslash nxt50. And you can join the movement that way.
Gene Tunny 57:26
Great. I’ll have to look into that. I mean, one of the things I found fascinating about this conversation, you talked about the indigenous people in Canada, we’ve got indigenous people in Australia. I don’t know whether any of the indigenous leaders in this country have been thinking about Charter cities, but that’s something I might follow up. Yeah, absolutely fascinating. Kurtis Lockhart from Charter cities institute. Thanks so much for the conversation, I really enjoyed it.
Kurtis Lockhart 57:51
Yeah. Thanks so much, Gene. This has been fun, appreciate it.
Gene Tunny 57:56
Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If So, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to email@example.com and we’ll aim to address them in a future episode. Thanks for listening. Till next week, goodbye.
Thanks to the show’s audio engineer Josh Crotts for his assistance in producing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au.
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