Private cities have long been a libertarian dream: shrugging off state shackles altogether and leaving the private sector and market forces to do the rest. Such concepts are non-starters in many countries, however, as the private cities would generally be perceived as an unacceptable loss of state sovereignty.

However, the flourishing of special economic zones (SEZs) in recent years has broken this taboo by establishing special jurisdictions within a broader, national jurisdiction. As such, they can provide a legal springboard for the development of private governance experiments. Now the Central American country of Honduras, which is suffering problems such as poverty, crime and corruption, is close to launching  its first prosperity zone with private governance elements.

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Laws of the land

“Private cities, or prosperity zones [which have a lower degree of autonomy], can be considered as next-level SEZs,” says Titus Gebel, founder of Panama-based Free Private Cities Inc. “In Honduras, hotel companies don’t invest in its beautiful island in the Caribbean Sea [Roatán]. The government told us one of the reasons is that the country doesn’t have a functioning court system to address things such as labour disputes. We then proposed something different.”

Mr Gebel joined forces with US-based NeWAY Capital to develop the ‘Honduras Próspera’ project. This project is based on the Honduran Zone for Economic Development and Employment (Zede) legislation approved in 2013, which established the legal foundation for private operators to govern autonomously in specific areas .

The operator has the power to propose a technical secretary to be elected by the residents and in charge of introducing (business-friendly) rules and enforce them - a state commission must vet these new rules. Besides, the operator also proposes independent courts based on the principles of English common law - another state institution, the Supreme Court in this case, must vet the courts and judges. 

It charges a fee and taxes to the companies and residents to maintain security and stability, and makes money from land transactions while sharing some revenues with the host state, which also retains oversight of the whole initiative. The mantra of its supporters is ‘stability’. “If a big international company commits to a really big investment, it doesn’t want rules to change every two to five years. We set the rules, and guarantee they are going to be stable. If anything goes wrong, we go back to the common-law idea; a decision by the judge becomes the law of the land,” says Mr Gebel. 

A win-win?

Honduras Próspera has now completed a first structuring phase as a prosperity zone and Mr Gebel is confident that final approval will be received in a matter of months. Only then will all the details of the projects be fully disclosed. However, the road ahead lies uphill considering several similar projects in the country have failed since in 2013, because local communities fear the risk that developments such as Honduras Próspera will become elitist and exclusive enclaves.  

However, Mr Gebel says: “As long as we create benefits for the host nation and we turn it into a win-win situation, we can make it happen. Look at Hong Kong: despite its current problems, China still sees the advantage of keeping it as an autonomous city, otherwise it would have been more assertive in its intervention. In Honduras, there is a problem with crime, corruption and inefficiency. Investors don’t want to come and [the authorities] can’t push through reforms because of opposition and entrenched interests. What should they do? Let’s create a Hong Kong in the Caribbean Sea!” 

Looking at Hong Kong, however, the end of its special status is driving the current conflict with Beijing, which arguably makes it a risky blueprint. Strong mutual benefits will be crucial to private cities – so Honduras Próspera will have to make good on its pledge to turn the Caribbean Sea into a tourism paradise that benefits both investors and local citizens.