Hi,
Here's how the sentence should read.
A modern city has been set up in what was a wasteland ten years ago.
Now I'll try to explain why, and I hope I'm right :) If anyone sees a mistake here, please chime in.
I think that 'what' is a relative pronoun that begins the noun clause '...what was a wasteland...'. This noun clause is the object of the prepositional phrase 'in what was a wasteland' which functions as an adverb telling where the city was setup.
I hope this helps. Have a great day!
Kind Regards,
Cynthia