Stephen Jennings on Building New Cities

0:04Conversations with Tyler is produced by the Mercatus Center at George Mason University, bridging the gap between academic ideas and real world problems. Learn more at mercatis .org. For full transcript of every conversation, enhanced with helpful links, visit ConversationsWithTyler .com. Hello everyone and welcome back to Conversations with Tyler. Today I am sitting in Tatu City, which is a special enterprise zone right outside of Nairobi Kenya. And I'm here chatting with Stephen Jennings. Stephen and I go back a long way. We knew each other in New Zealand over 30 years ago where we worked on New Zealand reforms together.

0:47To give you a brief overview of Stephen's biography, he was a critical figure in New Zealand and Treasury, working on those reforms. Later at Credit Suisse, first Boston, he has an extensive history of working in emerging economies. And he is now founder and CEO of a company called Rendever. Stephen is based in Tattoo City itself, again right outside of Nairobi. And Tattoo City is an attempt to reimagine urban environments for Africa. There are numerous other projects in other countries. and we will talk about what Stephen is up to, Stephen. Welcome. So, so good to be with you Tyler and it's been amazing to reconnect.

1:28It's like those 30 years were really like a week. I think 32 years we figured out right? 32 years. We just picked up the same threat of conversation and what is it thinking? Now try to sell me on Kenya. If I look at some of the other major African economies, they appear to have taken steps backward in the last two to three years. Why be optimistic about Kenya in particular? So, Ekenia has been on a path of modernisation, political and economic modernisation and development really going back to the 80s, so it's averaged over 5 % GDP growth over that period, but it's also modernised as an economic and political system moving away from one party, essentially dictatorship, to very vigorous democracy and pluralism as we saw last year.

2:13Huge development of infrastructure, modernisation of economy, improvements in school enrollment, life expectancy, you know, every indicator of development, as with much of the continent, has really been transformed over the last 25 years. And our expectations, that will continue. But say if politics is the major risk to African development, as it's proven in so many countries, why be more optimistic about the politics here? You know, we have a more pluralistic system. You haven't had the or dictators or disruption you have had in many other African countries. So the transition is very organic.

2:50We have the checks and balances of a system that you'd like to see in a country investing for the very long term. That's not necessarily the case in the likes of Nigeria or Wanda, or even in South Africa today. Why is it that so many African cities at least appear to have very low or even zero agglomeration externalities. It's not true for cities around most of the world, but it seems to measure is true for Africa. What's the difference and where does that come from? Something that's very unusual about Africa. So as you know in Asia, with growth, you saw agglomeration of economies and cities became more efficient.

3:27There's some pretty obvious reasons why that hasn't happened here. So proper planning and controls really broke down in the 60s. So there were no, the plans were not enforced. the development was completely haphazard. Utilities were not modernised and capacity was not built, so you have huge capacity issues and shortages around power, water and other amenities. You have enormous congestion problems. So the cities are clogged, the service levels are poor, the planning has been almost non -existent, and there are massive capacity issues and transport issues. So as they've grown, they've become more congested and less efficient.

4:06So you have a plan through Tatoo City and some of your other projects in essence to bring in collaboration externalities to at least some African cities. Is that a fair way to put it? Yeah, 15 years ago it was a plan. I think it's way beyond the plan now. I think we've proven beyond a shadow of a doubt. A few create new large -scale world -class urban infrastructure and administration. They will function as normal cities and you have the demand that you would normally have for a normal, efficient international standard city. So just give us some basic facts. Where is Tattoo City right now? And where will it be headed when it's more or less finished?

4:42Yes, Tattoo City is the only operational, especially economic zone in the country. And there's 5 ,000 hectares of fully planned urban development. It is at quite an advanced stage. So we have 70 large -scale industrial companies with us, including major multinationals and many of the regional leaders. We have 3 ,000 students come on site every day to our four new schools. We're advanced in building the first phase of the first new CBD for the region. We have tens of thousands of core centre jobs moving into that area, together with other modern office amenities. So all of the elements, we have many residential modules, thousands of new residential units at a wide range of price points.

5:26So all of the elements of a new city are in place. So how many people will end up living here? Around 250 ,000 and how many businesses? There'll be thousands of businesses. Yeah. The GDP of part to city. How would you imagine it? What would you compare it to? Assume things go out the project is mature. No, I think We're in seven projects in five countries. I think we're aware of every project across the continent But there's very little doubt at all that this will be the leading new city and the largest new city in Sub -Saharan Africa and eventually it'll catalyze a whole region. You don't have a barrier around this, the spillover effects in terms of development and infrastructure will extend way beyond the borders of the city and we already begin to see that.

6:11Why not do a charter city? We're first cousin, well, there's a lot of reasons that we haven't really had charter cities happen. It's a very interesting thought experiment. The whole issue of sovereignty, seating sovereignty and taking someone else's sovereignty is a pretty kind of intractable issue, but we're like first cousin to a charter city. So we're a private municipality with a lot of devolved authority. So we have the ability to make decisions the way that a charter city would be. We have the incentive to optimize the NPV, the long -term value of the city. And you can see that we've created many of the benefits in terms of quality of governance, quality of infrastructure, security, environmental amenities.

6:55So many of the envisaged benefits of charter cities are being realized within this model. So the way you've designed water supplies, sewage, electricity, local infrastructure, how is that drawn upon your background as a reformer and privatiser in New Zealand? So you're a chance to do it, right? Not in New Zealand, yeah, for sure. So did you learn there and how are you doing it here? Well, it's a bizarre situation that every area of reform and business that I worked and around the world, the threads of that are picked up in this project. So the governance issues through the reform efforts, designing SCZ legislation, obviously as a public policy issue, but I've worked extensively in water and power, so understanding how those businesses should be structured and organised makes it a lot easier to set them up and managing them.

7:43So, you know, a city is very, it's much more multi -faceted than you would think. The work that I did in New Zealand on Treaty of Weitangi issues with Māori has also informed a lot of thinking around community and properly right issues. So it's been this bizarre experience of all these threads for judicely being drawn together in these projects. What's the hardest part about designing the incentives for a sewage system? Not the physical work, but thinking through the incentives. The challenges have to do with scale and time horizon. So, in environments where utilities are not being provided by municipalities, everyone tries to solve their own solution, create their own solution.

8:25So they'll have their own water solution, their own power solution, their own, maybe their sewer solution, their own security solution. Clearly there's zero economies of scale and people don't have the expertise or even the desire to solve those solutions. So you have these very patchwork, extremely efficient and non -sustainable solutions to these very basic problems. So a city has the advantage that you are able to solve those problems for everybody and there's just a tremendous economies of scale. So in terms of quality and cost, you get these tremendous advantages over what everybody outside of that environment is able to create.

9:03But because Rendevar owns the sewage system, there's not the usual hold up problem with some outside authority. Is that fair or no? Yes, so one of the things you're solving is the whole problem at many levels. So everyone has to deal with bureaucrats who won't supply water, who won't provide licenses, who create tax issues. Every element of government you touch, there's a whole up issue. So there's economies of scale in solving that or mitigating that on behalf of everybody else. We have to deal with it, but it's more efficient to deal with it once than thousands of times for each to develop our nature is it?

9:39Well, let me tell you one of my biggest worries. See if you can talk me out of it. The more success you have in solving these hold up problems, the more the land the whole community is worth, right? That's what success means in the sense. So you create one really big hold up problem that the incentive of politics to confiscate the rents from the land goes up. And in terms of risk diversification, you put all the apples into this one big hold up problem. It becomes a juicy or target. How do you think about why that might work out? Well, clearly that is a risk. So the way you have to counterbalance that risk is you have to be adding more and more to the community and to the overall economy.

10:17So tens of thousands of jobs become hundreds of thousands of jobs. And those hundreds of thousands of jobs can end up supporting a million people or half a million people. A few of the largest source of FDI, a few of the largest proponent of investment within the country. So you have to be over time recognized as providing huge benefits to the wider community. Give us a sense of the range of price points. Say someone wants to live here. What is a cost? So you know, people envisage these projects as being like gated communities for the elite. And that is one model, but that's, if you think what a city really is, that is not a city.

10:57So a key dimension of building a city that's efficient and has a gleneration economies is much juicimics, tin -cream. And you can't just pay lip service to that to make NGOs happen. It's actually now interesting to do that. So for housing, we go down to about $30 ,000 for what is really a world -class product produced by Unity Homes. So in terms of the finish, the environmental amenities, security, pools, bars, these really are world -class units. Equally, we want the owners of major businesses and the biggest entrepreneurs in the region to come and live at Tartu City. So we might have a product where just your land is going to cost you a million dollars before you build your house.

11:43But it will be extremely beautiful. It will have amazing amenities and you'll be in the heart of the project. But we do and we have to accommodate for that full range. and not just in housing, things like restaurants and services, now salons. You can make it just for the elite in the shopping mall, or you can have a variety of formats where you accommodate everybody. And we go out of our way, and it's very unusual how we think about that. We want the worker who's earning $250 a month to do some of his shopping, to have a restaurant that is affordable for him. We make a big effort to provide those services for those people.

12:19Let's say either you or someone else wants to do a version of the idea, but with the price point at $10 ,000, what problem needs to be solved or what problems for that to be possible? How do you, the price point for what? For a home. So you're selling dwellings for 30 ,000 here and someone wants to, they're inspired by what you've done, but they're going to be in a poor location and they want to bring costs down so they can sell dwellings for $10 ,000. So that's exactly the problem to be solved. Yeah, but what needs to go right for that to be feasible? It's not so much what needs to go right. It's the planning the technology and the scale So if you want to get the costs way way down in the for a unit you can't have car parking Car parking is actually very if you're trying to go from 30 ,000 to 20 ,000 to 15 ,000 you can't have car parks So you you're building houses for people who will live within the city and who are gonna be within a walkable distance of their work Obviously you're going to go up.

13:19You need more and more scale. It's a chicken and egg problem and getting affordable housing in Sub -Saharan Africa, because no one has cracked that scale problem to what we're doing here. So you need bigger scale. You need to go up a little bit. I think we know with our partners that we can go from... We already know how to go from 30 ,000 to 20 ,000. And then it's going to get much harder going from 20 to 15 ,000. If cars cost so much for the community, how are you regulating cars? It's not the cost of the car. It's the cost of the land. Sure. But say I want to buy a unit that has a place for me to put my car, I can pay more and do that or I can't do that or No, absolutely you can and you can have two cars or three cars.

14:01I just have to pay a steep tariff to be able to do so. But if somebody else who would love to have a properly built, safe, secure apartment for 15 ,000 with nice amenities and a park and a playground, you can do that, but you probably won't have car parking for those people. In the mature version of the idea, how do I get from one side if I do city to the other? Let's say I don't have the car. There's no street cars, right? There's shuttles or I walk or there's e -bikes or... So a lot of ideas on urban planning, a bonnet or a driven by retrofitting of existing cities. There's a lot of principles that are paid lip service to, but the application of those is compromised by the fact that 99 % of the time urban designers are involved in the game of retrofitting.

14:50Imagine you sit down with a clean sheet of paper and you can think about how people are going to move around in the city and you can do whatever you want to. So if you ask the urban planner he will still start with designing a road. But maybe you start by saying no let's do human green corridors first and then we'll talk about the roads about how they fit around those human green car adults. And let's, as designs would say, create an invitation so that people really want to walk, they really want to cycle, they're not even on the side of a road, they don't have to go near a road. So they're the opportunities and we're in one of the most beautiful and one of the nicest climates in the world.

15:30So we have opportunities that you just don't have in a normal urban planning setting to change mobility to massively reduce the importance of cars but to bake that into the how we plan from the very beginning and that's very unusual. As you know there are many refugees in Kenya from other countries. Is there a possible vision where a special enterprise zone is built for them? It becomes a real functioning city or is it simply not profitable, too many obstacles? Or can you think of doing that? Diversity, as you know, if you look through history, the cities that really prospered, that made a difference, that were hugely innovative, they were diverse.

16:13They were safe havens from people for all kinds of backgrounds, including foreigners, peps even people that have been persecuted in other environments. So this diversity, this mixing of people, this crossroads concept, this global marketplace, and beating that in everything you do is vitally important. So you need mosques, for example. We want to have a big Somali community here. If we want that, we need to specialise infrastructure for them. We want to be the main hub for Chinese investment in the entire region. So we need to specialise institutions. We need to pay respect to Chinese culture.

16:46We need to listen to them, work with them, and quite nuanced issues sometimes. So you definitely don't want to go into any kind of segregation along those lines. What's the aesthetic vision for Tattoo City? You know, we're in one of the most beautiful countries in the world. We're in a country with huge cultural diversity and a very vibrant and distinctive culture. And we have a clean sheet of paper. So from a design and aesthetic perspective, we want this to be a Kenyan city. We don't want this you walk into Tattoo and you think, well, this is a bit like Dubai or this is a bit like Santa and a Jairan is big.

17:25that would be complete failure for us. But what does that mean concretely? What I mean I'm here now, but what do I notice as a visitor? Or I say that makes this a Kenyan city. So the way we're designing our CBD, there are a lot of subtle cultural references from different co -cubic, but also other tribal groups. And CBD, central business district, right? Yes. So what would be a reference of that kind? It could be the facade of a building, it could be the pattern on an aplaza, It could be who designs and the cultural references in a major sculpture. Here the Magumi tree is very sacred, so the scent we will be moving a massive historic and culturally important Magumi tree into the centre of the plaza.

18:07And then the other element is making it very green, very walkable and very beautiful and very safe. And baking that into how we plan the city from day one, really committing in a very deep way to those principles. generally that quite superficial in modern cities and this is because you're constrained by the old city. There's this huge element of retrofitting. We don't need to do any of that, but you need to embrace those principles in a very whole harder fashion. Takes more time, takes more effort, but the payoff I think is going to be massive in the medium term. Let's say you put aside budget constraints, forget about your shareholders, you're thinking unrealistically, realistically, you're up at night, excited about something you know you can't do.

18:50But what is that something? Is that it? I'll answer the question, but we don't think like that. Sure. So sustainability means it's commercially viable. So you have a lot of city projects that are massively subsidized by governments, particularly in petro -states. Our models are exactly the opposite. It doesn't matter what we want or what we might want to pay for. or matters what our developers and our clients and our residents, what do they want and what are they prepared to pay for. So we can bring all kinds of ideas of ours and all kinds of costs, but you can't do that and it's wrong to try and do that.

19:30So we don't try and impose solutions or levels of infrastructure people don't want or styles that people don't want. It's probably not how we look at things. There's things that we think our residents will want that are hard to bring. So let me give you an example. You can have good schools that the community is happy with or you could have a world -class school And in my view, there's a qualitative difference between those two because if you have a world -class school You will bring world -class Professionals the best professionals in the world and whatever that industry might be They'll want to come to your city because their children can go to a school that's as good or better than anywhere else So that's the kind of thing that challenges us.

20:16Putting aside all questions of politics, if you just think of constraints on the business side of what you're doing, what's the biggest constraint you face? The biggest constraint we face is human capital. We're obviously not land constrained. We're unleveraged, we have very good cash flow, we have very good finance and partners. We're absolutely not capital constrained in any way. So we're trying to do some world class infrastructure. world -class execution, world -class buildings, world -class technology. And by definition a lot of the human capital to do those things, it doesn't exist in this market.

20:53City scale, landscaping, urban realm, these schools don't exist. So you either have a lot of foreign consultants fly and fly out, they're not particularly focused, they're not necessarily the best consultants in the world, and it's just extremely inefficient. The constraint is embedding world -class technical people within a Kenyan team. What's the key variable that will determine whether the talent question goes well for endeavor or goes not so well? What is that in Japan? A lot of experience in doing the same thing in other businesses and other contexts, which I've been doing for 30 years now.

21:30You have to spend a lot of time. You have to spend a lot of your time identifying those people. checking those people, persuading those people, and integrating those people. It's very easy to hire some very senior development manager. But it's very hard to find the right person who's going to be committed to your project who will integrate your team and train local professionals. So it takes a lot of time and a lot of judgment. And what question do you ask people to try to determine if they're that young professional who wants to devote his or her life building out, see, tattoo city? Yeah, well, not, you know, interviews, it's pretty well documented.

22:11Interviews are a very inaccurate way of selecting and evaluating people. But it's often what you have. We'll check their prior work in a lot of detail. And we'll spend a lot of time with them, and we'll put them in a lot of situations without them actually knowing that we're deliberately doing that to see how they will react, how they will react with our local staff or they might be a dinner after a long day when they think it's time to relax. But we're actually looking to see how they interact with our clients. Do they listen? Are they respectful? Are they really interested? Or are they just going through the motions?

22:48So a lot of the recruitment information comes away from the interview process. How do they behave when you're actually negotiating they're dealing with the other teams, they're winning their deal. Are they timely? Are they honest? Do they play games? Do they change their position? So we rely on a lot of those kind of data points. Putting aside Tattoo City, which is your favorite part of Nairobi? And what about it? You find so interesting. It's one of the most lovely countries. I've been to over 100 countries coming from New Zealand. I know what a beautiful country is. You have incredible diversity of environmental amenities here.

23:23So amazing national parks, but very diverse from desert -like areas to mass -eye mara. You have incredible coastline, you have incredible cultural diversity. But say in Nairobi, what gets you excited about Nairobi? Other than improving your diet. Getting on my bike with a few friends on a Sunday morning, writing for 60 -70 Ks through just idyllic diverse countryside. like, why do you think the cost of living in Nairobi has so much skyrocketed lately? Everything's inefficient. Government's inefficient. But there's a delta issue when there's a levels issue, right? So is it food prices, energy prices, or what's going wrong at the margins?

24:06Yeah, clearly given the structure of the Kenyan economy, the external shocks have been very unfavorable. So fuel is imported here and grains are imported here. So they've been the big two short term drivers, and clearly they will unwind now to some extent. How should Nairobi fix its traffic problems? It's so far they've done what everybody does, and they've built more and more capacity, and as everybody knows, more and more capacity creates more and more demands. But it achieves nothing, and it's actually clogged up the centre of the city more and more. Clearly, there should be congestion charges, as there should be everywhere.

24:40But it's harder to do in low -tech settings. What do you think it can be done? I don't think through, I think technology is really, it's like so many economic problems. They're technically easy, but they're politically complicated. And obviously people try and blame the technology. No, the technology exists. It's developed a long time ago. It's ubiquitous, but there's not the political world to apply that technology. So the city will get more and more congested. Can a subway system be built? So most of the rest of the developing world has been through exactly the same problems. They're really problems of governance.

25:15The 99 % problems of governance, water, power, municipal transport. These are all governance problems, not technical problems. Urban realm, we know that these problems can be addressed. In my view, the governance issues here and in most of Sub -Saharan Africa mean that these problems won't be solved for the next 25 years, at least. Hence the demand for new modern urban environments. should we be trying to title all land in Nairobi and in Kenya? Or is it more efficient when you have a sector with untitled land, lower prices, less formality, arguably less regulation? What's the right way to think about the land titling issue?

25:55You know Stigler said all regulation is rational devised. So the inefficiency in land titling and land offices is very purposely designed to be inefficient, anti -facilitate corruption and cartels and land offices, such a huge source of rents. The Kenyans are in the process of digitalisation. They can digitalise the whole thing in great transparency in their sleep probably in six months. It's a question, is there the political will to deal with those cartels and the rent seekers who are benefiting from the existing system? But you think it is an ideal to title everything, even though rents probably would go up?

26:34No, absolutely it is. I mean, lack of land, poor enforcement and definition of property rights is one of the biggest barriers to development in the region. As you know, Kenya has many different ethnic groups, tribal groups. If you think about the prospects for Kenyans, all truly thinking of themselves as a single nation, what variable does one track to see how well that's going? I mean, is it the soccer team? Is it what music they listen to? Is it something about politics? It's probably urbanisation because once people move into an urban setting, those tribal barriers and differences they gradually melt away and you can see that and you're going to see it this week in our office.