The Indian Economy Blog

May 7, 2007

Financing Designer Cities

Filed under: Growth — Atanu Dey @ 11:48 am

“If you believe that the money exists for building amazing futuristic cities in India, you must be certifiably insane.” That is the standard reaction to my scheme for building 600 cities for the 700 million Indians currently trapped in 600,000 villages. Where will the money come from? My answer is simple: out of thin air. That’s when they suddenly remember that they have an urgent appointment with their hair dresser or chiropractor.

Wait, wait, I say. That’s how all wealth is created: out of thin air. Cities create wealth. And that wealth is what creates cities. Isn’t that the old chicken and egg problem? It looks like that but there is a way out of this seemingly impossible situation. But first we need to get a couple of building blocks for constructing the argument.

Let’s first distinguish between an expense and an investment. When you buy a productive asset or what is called capital asset, it is not an expense, it is an investment. You may have to borrow money to buy the asset but if you have chosen wisely, your asset will produce enough wealth for you to repay the loan in due course and you end up with the capital asset. What you need is the smarts to use the asset to increase your productivity. The capital asset may be as trivial as a cell phone that a vegetable seller uses to increase his sales. Or it could be as massive as “buying” a city to increase the productivity of millions of people.

The money spent in human capacity building – also known as education – is an excellent example for distinguishing between an expense and investment. The raw material is the basic human brain. The money spent transforms the raw brain into a trained brain. If the lifetime earnings of the trained brain exceeds that of the raw brain by at least the cost of the education, then you would say that the return on that investment (ROI) is positive. It is an empirically verifiable fact that the ROI for education is positive because investment on education has persisted for centuries. If the returns were non-positive, the market would have selected education out for extinction.

Modern factories are another example of a capital investment which create new wealth. Simply put, factories increase the productivity of the people. Which means that more stuff gets produced using the same or lesser effort. The increased production is more than what it took to create the factory in the first place. That is why factories persist.

A city, I submit, is capital equipment just like a machine or a factory. Only difference is that it is large. And while the cost of a city is large, so is the wealth that it creates. Therefore, theoretically at least, it is possible to “buy” a city on borrowed money and then pay back the loan from the increased income that comes from the working of the city. That is the secret of creating wealth out of thin air.

[This is part four of a ten-part series. The previous parts are Ancient Cities, Modern Slums, Designer Cities, and "Best Laid Schemes." The next part is Coordination of the Factors.]

7 Comments »

  1. I think you might agree whether we have the money to build these designer cities or not, it would be insane to do this without any STANDARDS IN INFRASTRUCTURE PLANNING AND DEVELOPMENT. India has no standards. Each city, state follows its own process of planning and developing infrastructure. We desperately needs these infrastructure standards. Standards are what have allowed technology to reach its scale and size.

    Comment by Indiamusing — May 7, 2007 @ 4:40 pm

  2. [...] [This is part three of a ten-part series. The previous part: Designer Cities. Next part: Financing Designer Cities.] [...]

    Pingback by The Indian Economy Blog » Best Laid Schemes — May 7, 2007 @ 5:09 pm

  3. ok. you call for increased investments to create capital assets (DeCi’s), which pay back in due time. Now, lets go into this a bit —

    1) Whats the time lag for ROI ? 10 years ? Who is going to invest for such a long period ? (a) private money ? Would you “invest” your private money on a DeCi, and lock it up for 10 years without any guaranteed return ? Not gonna happen. (b) Foreign money ? Hedge funds ? Yeah right ! (c) The only option. Govt spending through taxation. Now, the taxation could be direct or indirect (indirect in the sense, running the printing presses, and creating indirect tax on currency — i think they use the term “inflation” for that. This looks lot easier, because you need not convince people about paying taxes or going through the elaborate procedure of collecting taxes).

    Now, i think you are no fan of Nehru (tell me if iam wrong), but how is this concept different from massive social spending he engaged in ? Nehru also created “capital assets” so that they pay back in the long run. He used public money for that. ok, maybe we could just get the Govt to collect the money and “contract” it to private parties to do the real job. Somehow this doesn’t sound very different, or free-marketish.

    2)Is the human capacity building (education) done before trucking people into DeCi’s or after ? Because without education, i don’t know what economy we are going to create within a DeCi with a million uneducated villages suddenly parachuted into it.

    I hope you address some of these points in future series articles. Thanks.

    Comment by Madhav — May 7, 2007 @ 5:15 pm

  4. DeCi’s will run into tough competition with other productive assets that might provide better ROI like roads, irrigation facilities, basic sanitation, basic education, fight against diseases etc.

    While we see initiatives like 1 lakh car from Tatas, $100 laptop, no one seems to be going after low cost housing. Of course builders have no incentive in doing that. Or do they? why does construction have to have bricks and cement. how about wood, plastic, scrap material. I heard of IKEA folks planning a assembled apartment like dwelling for around $10,000 (Rs.4 lakh). Let IKEA figure out the design, Chinese will make it cheaper. That is something thinkable…picture perfect cities are a dream not worth spending time on.

    Comment by Ashutosh — May 7, 2007 @ 8:26 pm

  5. [...] [This is part five of a ten-part series. The previous post is Financing Designer Cities.] [...]

    Pingback by The Indian Economy Blog » Coordination of the Factors — May 8, 2007 @ 8:39 pm

  6. Hey Atanu,

    I totally agree with you on this one — the interesting thing is that private investors willing to deploy large pools of private capital to create designer cities from the ground up already exist — check out this excerpt from the Hindu — and lets hope the planners get the $#%# out of the way. ;)

    [excerpt]
    On Republic Day this year, Macquarie Bank, Australia’s largest securities firm, announced that it will invest $25 billion along with three partners to create an ultramodern integrated township on 65,000 acres in Andhra Pradesh, just 170km off Bangalore.

    Four weeks later, Tishman Speyer Properties LP, which owns New York’s famous Rockefeller Centre and Frankfurt’s MesseTurm, said it, along with ICICI Bank and Nagarjuna Construction Co, will build a $2 billion residential and commercial township for 30,000 people, spread over 400 acres near Hyderabad.

    On Monday, or exactly another four weeks after the Tishman announcement, Al Nakheel LLC, an international property development firm owned by the Dubai government said it will, along with DLF Ltd, build two ‘Manhattans’ :cheers: near Mumbai and Gurgaon, spread over 20,000 acres each.

    Each city will cost about $10 billion or Rs43,300 crore to construct, with the first phase, expected to be completed by 2010, seeing the partners investing $5 billion apiece.

    In all, $47 billion or Rs203,000 crore of private money will be invested over the next couple of years to create four ultra modern cities from ground up.

    The cities near Mumbai and Gurgaon will be three times as large as New York’s Manhattan Island, DLF said.

    All the four cities will be world-class and self-contained, with wide, international-quality roads, telecom networks, educational institutions, industrial clusters, hospitals and amusement parks.

    Comment by Brown Sahib — May 11, 2007 @ 11:01 am

  7. Brown Sahib, thank you for the pointer. Cheers.

    Comment by Atanu Dey — May 12, 2007 @ 9:46 pm

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