Failed and Bankrupt Cities

Bankrupt cities

StocktonCities do go bankrupt. A judge accepted the California city of Stockton’s bankruptcy application today, with 300,000 residents making it the most populous city so far in the United States to enter bankruptcy.

In past decades, many US municipalities declared bankruptcy. Since 1981, 42 cases were filed. Given hard times getting harder in the developed world, what is happening now is unprecedented since the Great Depression.

Across America and Europe, cities and towns face the same dilemma. It is not pretty when mayors and municipal managers can not meet payrolls or pay other expenses. Short of turning out the lights and shutting down municipal government, they slim down services and reorganize. Life goes on as usual but not easily for many. Ordinary people suffer most. Basic services get scrubbed to the bone. Bare bones resources are left.

When other choices run out and there is no bailout, then bankruptcy is the final option. Ordinary people lose jobs, homes, and vital services. The American dream becomes just a memory.

Lost DetroitDetroit, that we have written about before on this blog, has not gone bust yet, but it is dying. Half or more working aged residents have no jobs. Those with them have low-pay part-time or temp ones.

For over a century, Detroit was America’s industrial heartland. It attracted workers from around the country for high-paying jobs with good benefits. Now they are gone. In the last decade, half the population left. Factories and neighborhoods are empty. Detroit is America’s poorest big city. Poverty, unemployment, hunger and homelessness are endemic. Former middle class residents suffer like others. Their status reflects a national nightmare.
Usually one can find a clear correlation between failed places and bad place management. Stockton that went bankrupt today is ranked as the 3rd most illiterate city in the United States with less than 17% of adults holding a college degree. Stockton also has a reputation for high crime rates relative to other cities. As of 2012, the city was the 10th most dangerous city in America.

Given the low rate of education and high level of crime, why would any talented person or any business investor look to Stockton for relocation or making investments?

California mapThe truth is, Stockton is centrally located in California, relative to both San Francisco, San Jose and Sacramento. Given its location, its proximity to the state and interstate freeway system, and relatively inexpensive land costs, it has competitive advantages could be presented as an attractive place for businesses to locate investments. However this has not happened. Why?

Like well run businesses thrive, so do well run places. The importance of visionary, foresightful and competent place management cannot be underestimated.

Another city in California, San Bernardino, filed for bankruptcy last August. It is a poor city and its economy is bad, but why does one city fail while many others like it do not? Again, the answer is, inadequate and often bad place management.

This excellent Reuters report on San Bernardino provides one strong clue. When you are the poorest city of your size in your state, yet your police and firefighters can retire at the age of 50 with a pension that is 90% of their final salary, you are a strong contender for bankruptcy, sooner or later.

Place managers need to understand trends and follow demand. They need to optimise assets and resources and work hard to attract talents and investors in the global competition for attention.

Failed places

The other extreme is new, planned cities that never actually take off.

Ciudad ValdeluzAn example of failure to foresee demand is Ciudad Valdeluz in Spain. It was supposed to be a bustling modern metropolis housing 30,000 people not far from Madrid, but all that is left now is a ghost town with barely 1000 residents.

Work halted on Ciudad Valdeluz in the summer of 2008 and as yet, no date has been set for it to resume leaving 75 per cent of the city unfinished. The city has become a ghost town, characterised by its deserted streets and empty spaces.

Ciudad Valdeluz is perhaps the starkest example of the Spanish property crash and the failure to realistically appreciate demand. I just wonder on who’s balance sheet all the properties reside? Five years after Spain’s residential property bubble burst, prices are still tumbling and have much further to go, with one million properties on the market and unsold.

KilambaAnother example is Nova Cidade de Kilamba, constructed on the outskirts of Angola’s capital city Luanda. It is probably one of the largest construction projects in Africa and it was supposed to be a state-of-the-art city. However eerie footage shows how the Chinese-built urbanisation is at risk of becoming Africa’s first ‘ghost town’. The city has 750 eight-story blocks of flats, a dozen schools and more than 100 shop units, most of them empty.

Successful real estate development requires staged development that meets demand, so that a critical mass is achieved at which continued growth is driven by market related forces.

Kilamba was designed to accommodate 500,000 people but it is almost empty. Even though Angola had stellar growth, with 11.1 percent the worlds highest annual average GDP growth in the period 2001–2010, the country’s economic development accelerated from a very low level and it does not yet have a middle class able to buy such homes. Built for people with income levels that do not yet exist, they will never move in, and Kilamba will leave those who did buy property with a worthless asset they cannot sell.

Dubai Palm JumeiraFor a while during the recent crisis, it looked to me like the property boom in Dubai was heading for a similar failure. The Dubai real estate market burst spectacularly in the autumn 2008 as investment cash dried up. The young mortgage market collapsed and the job market imploded. Property prices plummeted by 60% in a few months.

However in Dubai competent place management has succeeded in creating a turnaround and five years later Dubai is growing again and the business climate is optimistic. When I was there three weeks ago, the place was again full of optimism, drive and high expectations for the future. This is not by random chance.

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