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Outline
Introduction
A Modest Proposal
Incentives for Pooling
Avoiding Hold-Out Problems
Multiple-Tenant Income Property
Political Automomy
Internal Order
Competitive Provisions of Common Services
Advantages of the Pooling/Leasehold Approach
Summary
 
 

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Recently a member of the Free Nation Foundation proposed looking into the feasibility of establishing a free nation on the island of Nevis, in the Caribbean, in the event it secedes from St. Kitts. The constitution of the larger federation with St. Kitts allows Nevis, with a population of some 9,500 persons, to secede and establish its own constitution. Rich Hammer emailed a few friends of the Foundation some initial thoughts on the subject and invited them, as an exercise, to submit scenarios as to how this might be accomplished. Rich's initial thoughts were:

Instead of putting his faith in politics first, believing that business enterprise would follow, I felt that Rich (I'm personalizing "the organization") would have a better chance of success if he put his faith in business enterprise first and foremost and dealt with politics secondarily and as little as possible. He could offer to consult on a constitution, but not offer money; that would surely be seen as intervention in island politics and weaken local commitment.

If he could give them a realistic vision, instead, of what might be accomplished in an environment respectful of property, things might begin to fall into place. What would such a vision consist of? How about, I thought, inviting the islanders themselves to create a freeport that could become a beacon to the world? I suggested to Rich that the existing owners assembling land through voluntary title pooling might be a key to developing a free nation.

Rich called my bluff: "Write it up for Formulations," he said. "Okay," I said, "I'll give it a try." Since I don't know enough about Nevis and this is only an exercise in any case, my island is a wholly imaginary one called "Antibes." The following scenario is intended as a thought starter—which was the whole purpose of Rich's emailed invitation.
 

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A Modest Proposal

Envision an enterprising firm, one with land development and property management expertise, sending a reconnaissance team consisting of an anthropologist, a businessman, and a geologist to visit the island of Antibes for a few months. During that time the team members would get acquainted with the people, their history, their culture, and the physical features of the island. If the team members found the local population compatible for purposes of doing business and were able to identify one or more tracts of land suitable for development as a freeport, then the firm could approach all of those who owned land within those boundaries with a proposition.

The proposition would be that the tract be assembled into one parcel, not by an outsider who would buy out the owners' interests, but by the existing land owners themselves. To do this they would form a corporation or similar entity, appraise their separate properties, and then pool their land titles in exchange for equivalent, undivided shares, or equities, in the assembled whole. For its entrepreneurial role and guidance, the firm would ask of the new business entity either a planning, development, and management contract, or else an option on a long-term leasehold on the property, say 99 years, for an amount to be negotiated.
 

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Incentives for Pooling

The land that each owner would consider pooling presumably would not be his residential site or subsistence garden—land which he was using for consumption purposes—but rather idle land or land from which he would normally look to derive an income by sugar farming, renting out, or other means. The incentive to each owner would be the prospect of exchanging an illiquid, relatively unproductive, precarious ownership (precarious in the sense of having an uncertain return) for a more secure, highly liquid share ownership (liquid in the sense that the shares ultimately would trade on an exchange and be bought or sold by a phone call) in a productive enterprise. The enterprise would stand to be more productive than the land owners in their former situation because it would have a property well situated and of a size adequate to warrant world-class management. A tract of land extensive enough to create its own environment for its contemplated use, that is to say, large enough to capture a significant part of the land values it would create ("internalizing its externalities") and relatively protected from any possible negative effects of adjoining land uses, would have economic development potential far transcending that of the same extent of land in fragmented ownership.

The cost to each owner of pooling would be his pro-rata share of the legal fees—which the firm might advance, to be repaid in equity options or out of future earnings. Following the principle of plottage, the mere act of pooling would raise the value of each owner's equity even before any steps were taken toward development. Plottage is the increased value of an assembled site over and above the sum of the value of the parts before assembly.

The new business entity formed by the islanders to take title to the tract could be one of two kinds. It could be a holding company, which as it received lease payments would pass the money through to the owners, or—which would be less likely in an underdeveloped part of the world—an operating company, employing management directly to develop and operate the property, reaping the profits and bearing the losses of the enterprise.
 

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Avoiding Hold-Out Problems

A common practical objection to pooling proposals is the possibility of some owners holding out for more than their appraised share and thereby demoralizing the project. To avoid this, the entrepreneurial firm would assist the owners in forming the new entity on paper in advance of it receiving any assets and would begin assembling options in its name. By developing a business plan for the new entity, the firm would appeal to those land owners they hoped would participate by holding out the vision of how the freeport would create undreamed income and opportunities for all. But it would make it clear that this would hinge on a certain minimum acreage being optioned by a specific deadline. The firm would then wait for the land owners themselves to take the initiative for bringing their slower members into the plan.

Besides setting a time limit after which, if the options acquired were insufficient, the plan would be abandoned, the firm might employ a second strategy. This would be to identify, on the same or another island, additional tracts of land suitable for the freeport development. The firm would then let it be known that the tract that would be developed would be the one whose owners first completed the optioning process. This would add the excitement of competition; owners in each group, wanting their land to be chosen for the freeport, would exert pressure on their lagging neighbors. This was an approach used successfully for many years by El Paso Natural Gas Company to assemble rights of way for pipelines without recourse to eminent domain.
 

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Multiple-Tenant Income Property

Once having assembled a tract of land for freeport development, the new business entity would find itself capitalized with an exceedingly valuable piece of real estate. Depending upon whether the new entity chose to be an operating company or a holding company, it or the enterprising firm would now take the business plan to the appropriate financial institutions. By collateralizing either the land itself or a long-term lease, one or the other would raise the required development and working capital through loans, equity financing, or a combination of both.

The freeport would not develop as a subdivision, selling off sites, but would keep the land together for continuing management and operate as a long-term investment property in real estate—a multiple-tenant income property. Beginning with a carefully selected, synergistic mix of specialized land uses, it would gradually move in the direction of becoming a fully generalized community. Improvements on the land would be individually owned, but the land itself would be leased, both long and short term, and revenues from the land would fund investment in city services and infrastructure—obviating any need for taxation.
 

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Political Autonomy

Early in the venture, the entrepreneurial firm would negotiate with the government of Antibes for autonomy within the freeport area. It would not ask for "sovereignty" (which island politicians likely would oppose for fear of being accused of selling out their patrimony) but for exemption from all taxation and regulation during the start-up period or even for the entire duration of the lease, in exchange for an attractive payment during each year that such relief was granted. (A single payment up-front would provide no continuing incentive for the government to honor its commitment.) The public budget on an island being small, these payments alone might relieve the government of any need to levy taxes on the Antibean population. Some years into the project, if profitability met certain anticipated projections, the government might even be able to declare a small annual dividend to its citizens.

If the freeport moved ahead according to expectations, with a totally free hand to compete in world markets and relieved of all taxation, licensing, or burdensome restrictions, it doubtless would become so productive that in the course of time any question of political threat or usurpation by the host government would become wholly academic. As the sole or major source of revenue for the government, the freeport, whose owners would include an influential segment of the Antibean population, would have ample opportunity to monitor the honesty and efficiency of the public administration. The entire island then would be a de facto free nation.
 

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Internal Order

To the extent that the level of spontaneous order within the freeport area itself required supplementation by security patrols, safety rules, and courts to hear disputes, the management interest and insurance interests combined would see to its provision. The freeport would be the farthest thing from "anarchy." The most basic guarantee would be its operation as a multiple-tenant income property. If a tenant or her guest or invitee behaved otherwise than as a gentleman or a lady, out he or she would go; if there were any question about this, then out would go the management—sacked by the Antibean owners, who would have written appropriate safeguards into their over-all lease. Control would be contractual and at once more firm and more flexible than could ever be attained under statutes. In an earlier paper, "A Model Lease for Orbis" (Formulations Vol. III, No. 3), I suggested in detail how this might work out entirely through free-market mechanisms in the absence of a political monopoly of the court system. Economist Bruce Benson, Florida State University, has also written extensively on this subject from a different but wholly complementary direction.
 

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Competitive Provision of Common Services

No monopoly of common services would be anticipated. Income to the freeport authority would be predominantly from landlease payments and only incidentally, if at all, from user fees for utilities. The responsibility and concern of management would be to assure that all public services and amenities were provided, since that would vitally affect the desirability of leaseholds and hence the revenue stream, but not necessarily to provide them directly. While always making itself available as a fall-back, it would welcome the competitive market provision of such services. With the exception of the leasing function and exercise of tenant selection, which would remain solely the responsibility of management, it would not preempt the field of public services.
 

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Advantages of the Pooling/Leasehold Approach

Participation of Antibean Population

This approach to a free nation would be respectful of the indigenous population of Antibes, of whom a number would enjoy a dignified status as the ultimate landlords of the freeport. A long-term lease approach after the pattern of Hong Kong, with option to renew after 70 years (in the case of a 99-year lease), might be more acceptable to the islanders in the long run than if outsiders bought up the land for freeport development. As share owners in a holding company that leased the land for development and retained a reversionary interest, the islanders would correctly feel that they were participants and not that they had sold a part of their patrimony—an issue that could fester politically for years to come.

Although not as soon or to the same degree, islanders who had not had an opportunity to join in the pooling would benefit as well. As the freeport grew, it would require a corresponding, supportive economy on the island. This would give the local population a wide range of options to choose among for profitable development of their own properties—not to mention the ever-present possibility of merging their lands or some parts of them with the freeport as it developed in order to benefit from its professional management.
 
 

No Conversion of Belief

No education of the Antibean population to a libertarian ideology would be required. The language of business is universal and sufficient. None other would be called for.
 
 

Capitalization No Obstacle

Such an approach would dispose of the need for a financial backer, whether an individual or organization, who would be willing and able to commit $100 million speculatively to acquire a piece of island real estate in advance of any development, make additional substantial payments for development costs, and then underwrite the operating costs of the freeport for the decade or more it would take for the project to break even—and all the while foregoing interest on that sizable chunk of capital.
 

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Summary

The otherwise daunting capital requirements for land acquisition, development, and start-up operation of a freeport would pose no great problem for owners who voluntarily pooled their titles. Such capital would not have to be brought from the outside. The owners already have the required equity; it is just not in a very useful form. The value of the pooled properties would capitalize the project, making it essentially self-financing. Moreover, politics would not need to be invoked, since the needs of all parties would be met voluntarily and contractually. The indigenous population and the newly arrived on Antibes would be united in mutual accord, a basic harmony of interests and incentives that would incline them toward cooperation.

The dream of a free nation would be achieved not frontally but indirectly. It would come into being not politically, by resistance or confrontation, but by a normal growth of productive and profitable enterprise. D
 
 

Spencer H. MacCallum, an anthropologist living in Tonopah, Nevada, can be contacted at: <SM@Look.net>.
 
 

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