The value of cities

In Australia, 7 in 10 people live in our five major cities. This is not just an Antipodean trend; the UN[1] reports that 5 in 10 people around the world now live in urban areas, with this accelerating to 7 in 10 over the next 30 years.

The reason – big cities are, on average, twice as productive as the countries in which they sit. Accordingly, people flock to get a piece of the big city pie. The flip side, as we well know is that big cities can be crowded, dirty, dangerous and lonely places, if we do not actively consider how our Cities will a home for all parts of our community..

Cities create value through the ability to help individuals specialise, collaborate and enjoy shared assets that would not be created by anyone by themselves. 

To be more productive, cities need to embrace diversity in all its flavours, reduce the barriers to collaboration and have smart government intervention to enhance public value and minimise the downsides of city living. 

To do so, those governments need to evolve progressive funding models that allow some of the value created by cities to be channelled into making them better.

Individuals and companies also have a major role to play in realising cities that enable prosperity.

Read on for more…

Are cities valuable?

Using publically available data, I compared the GDP of a hundred or so of the world’s largest cities, with that of their countries as a whole. What this data showed was that cities, on average, produced twice the GDP (in purchasing power terms) as the countries in which they exist[2].

The accepted wisdom for 20 years is that cities get more productive, with size.When I graphed the size of the city against the productivity differential, it revealed some other interesting things:

• Contrarily, relative productivity declines as size gets bigger, probably because they start to be the same as the country when they get really big, but also because..
• The existence of super productive cities really tops out at 5 million people (the two most relatively productive Manila and Paris are cities that economically dominate their respective countries) and
• There is huge variation in the relative productivity of cities but this variability seems to reduce as cities get bigger, meaning that in order to grow really big, the downsides of size end up being managed

In absolute terms the most productive cities in terms of GDP per capita were Paris, Milan and Los Angeles, three cities with not only a large economic but major cultural impacts, albeit delivered in three markedly different ways (romance, design and entertainment).

When looking at Australia, the biggest cities did not fare so well, reflecting the regional impact of the resources and agricultural industries, which have a sizeable GDP largely outside the big cities. Perth and Brisbane, the cities closest to most resources, were more productive, illustrating the effect of this peculiarity of the Australian system.

How do cities create value

So cities can and do create value, but it is not a simple “big is beautiful” story. It is worth reflecting on how cities create value. Here is a non-exhaustive list:

• Cities allow people to specialise, meaning that they can gain the efficiency of focus and experience in one or two skills
• The size of a city makes it more likely that businesses and other organisations can operate at adequate scale to realise economies
• The proximity of people, improve the opportunity to trade and collaborate, which as we have explored in other articles, mostly makes all parties better off
• The existence of cultural, environmental and social institutions, transport, collaboration and educational infrastructure are more available in larger cities creating spill-over benefits that we all enjoy

So there clearly is a basis for cities to make a big positive difference.

What are cities challenges?

The variability of cities economic performance means that not everyone gets it right. I have been fortunate enough to visit more than 250 cities around the world, and my observations of what can destroy value in cities is set out below:

• Congestion and travel: As cities get larger, often this creates massive congestion and long travel times. This creates huge costs, but also makes the enjoyment of the benefits in the previous section much less likely
• Pollution: As anyone who has lived upstairs from a party at 2am on a Sunday morning knows, living close to one another makes the impact of all sorts of pollution. In large cities, then huge volumes of people create pollution, which is concentrated and hard to get away from if not well deal with.
• Crime/corruption: Lack of social cohesion/connectedness, fairness and adequate social norms around crime or corruption can really rob a city of the opportunity to perform at it's best. If you’ve been to the otherwise amazing city of Rio de Janiero, the crime issue inhibits the success of its otherwise enviable cityscape.
• Infrastructure decay: When I lived in New York in the late 1990s, I was amazed at the time-worn state of transport and other infrastructure across not only New York but other really wealthy cities all across the US. This sort decay puts at risk the benefits of a city, but also make it more likely to reveal the downsides of city life.

What can we do to make them better

Cities can be engines of economic growth, wealth and well-being. But only if they are well managed. Everyone has a role to play in achieving better outcomes for our cities:

• Individuals: Connect, collaborate and be heard about the issues that matter. Recognise that paying your fair share of taxes for the services you receive is not just an impost but a way to ensure that your cities and countries are worthwhile places to live and do business.
• Commercial organisations: Being inclusive, willing to engage in the debate, collaborative and alert to your own contribution to community health are all ways for companies to be better citizens.
• Governments: Designing programs to address potential city challenges, and encourage initiatives that build shared infrastructure of all types, and design funding models that allow for maintenance and improvement of city value.

Conclusions

Cities can bring out the best in humanity, but also the worst. Taken as a whole, they have been some of the most significant growth engines of economic development; provided of course that the downsides are carefully managed.

At PwC Australia, we recognise that building better cities is crucial for Australia’s economic and social development, and that we all have a role to play. Accordingly we are focusing areas of our practices that touch individuals, companies, infrastructure funders and government to engage in conversations that move our cities forward (to learn more visit https://www.pwc.com.au/agendas/cities.html). Based on the difference that cities make, these conversations are ones really worth having.

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Richard Stewart OAM is a Corporate Value Advisory partner with PwC. He has been with them for 30 years in Australia, Europe and the USA, doing his first valuation in 1992. He has helped his clients achieve great outcomes using his value skills in the context of major decisions, M&A, disputes and regulatory matters. His clients span both the globe and the industry spectrum. He holds a BEc, MBA, FCA, FCPA, SFFin, FAICD and is an accredited Business Valuation Specialist with CAANZ. He has written two books, Strategic Value (2012) and Hitting Pay Dirt (2017), published in 2012, and is an Adjunct Professor at UTS. Thanks to my colleagues Clara Cutajar and Kylee Anastasi for their review and comments on this article.

[1] http://www.un.org/en/development/desa/news/population/world-urbanization-prospects-2014.html

[2] These data were sourced from Wikipedia pages downloaded 17102017. Data from 2014 for city real GDP, 2017 for country PPP GDP per capita and city populations