Smart City Financing: Challenges and Opportunities

A recent Deloitte report, ‘The Challenges of Paying for Smart City Projects’, has examined the ways in which cities could choose to finance their smart projects through various funding and financing strategies. This is a challenge faced by many of the local authorities we speak to and collaborate with; whilst they are excited by the potential of the ambitious Smart City Project, finding the money to support the products and services entailed therein can be a complex undertaking. Such complexity requires time and exploration from the authority to understand the full range of options available, the advantages and disadvantages of each, and ultimately, how to choose a strategy bespoke to its own situation.

One unique issue local authorities face is that would-be sources of finance may fear that being an ‘early adopter’ in this technology can actually be a drawback, particularly as some areas of digital infrastructure remain untested, or tested only to a limited capacity. Without proven benefits of adopting a given approach, investor confidence may initially be low, making it tricky to secure sources of funding. Planned socio-economic benefits sound positive on paper, but ensuring they can be monetised once implemented is quite another matter. To encourage reticent investors to commit to the project, local authorities need to fully understand it themselves: its potential cashflows, the range of financing options available to ensure its fruition (both at local and international levels), and procurement methods.

The Deloitte report presents some interesting and useful data on how Smart Cities’ projects are funded worldwide. 41% of municipalities engaged in this transition rely on a mixture of public and private funding, the most popular options. A combined 49% relied on solely public funds of some kind, which breaks down at 19% using a ‘mix of public funds and state grants’, 11% using regional funds and 4% using EU funding to achieve their respective transitions. Only 10% of Smart City projects are purely privately financed, according to the report.

A New Finance Model, For A New Age

Part of the problem for local authorities seeking to make the digital transition is that doing so usually requires departing from traditional models of financial infrastructure. Traditionally, infrastructure projects tend to be paid using debted investments, whereby the municipality would secure capital from financing sources, typically commercial or development banks, using municipal bonds. This investment would then be placed into the costs of construction, with a grace period accorded until it is completed, when the debtor would then have to repay the funds, usually made possible with the operational revenue stream of the infrastructure asset.

But Smart Cities go beyond traditional physical infrastructure – they offer a whole new operational public service that operates entirely in a digital space. Rather than being concentrated in just one aspect of public life, such as new roads or public transport offerings would be, the realised Smart City would function laterally across sectors, thereby allowing new synergies between previously disparate infrastructure systems.

The report highlights prominent examples of this reality in the case of connected street lighting – a topic we have previously covered in some detail on this Blog. Being ubiquitous across a city, street lighting is ideal for housing the small cell and IoT technology essential to bring about a Smart City transition. On a basic level, sensor technology can be used on lighting to ensure they self-dim when pedestrians aren’t nearby, saving energy. But the utility of Smart infrastructure goes far beyond its energy efficiency, as these sensors also become a hub to harvest useful data, providing insights to municipalities. For example, cities across the globe have already had success installing environmental sensors to street lighting in order to monitor air pollution, temperature, and parking spaces, among others. In this way, the connected infrastructure essentially becomes the ‘nervous system’ of the city. Revenue streams for smart street lighting therefore go beyond energy efficiency alone, and centre around the economic value of data, which can span a multiutde of urban management functions.

Increasingly, it’s beginning to look like a combination of public and private sector investment – and thereby a concomitant sharing of risks and rewards – will be the most popular method of Smart City financing moving forward. Pay-for-performance options are currently being trialled, where private sector entities might finance the improvement of existing digital infrastructure areas or improve their own access to data, services, and insights. In this way, they will see a direct improvement in revenues resulting from the investment they have effectively made in a broader, city-wide infrastructure.

Building A Collaborative Strategy for Smart City Financing

With the proportion of people set to be citydwellers set to rise to 66% by 2050, cities across the globe are looking to proactively invest in and modernise their infrastructure. The report suggests that a positive first step should be fiscal incentives such as tax abatements and qualified infrastructure bonds to specifically address the needs of a Smart City project.

As we have previously discussed in our Blog, it looks like the most effective way to invite private sector investment will be to pursue an effective promotion strategy with both the public and business owners, which will invite both good publicity and, hopefully, private investment. Municipalities should look to bring public and private investors and stakeholders together to discuss shared financing options and the splitting of risk and reward accordingly, creating a truly collaborative approach to funding.

To ensure greater buy-in, performance-based revenue sharing will also need to be a key feature of the delivery model; both public procurers of services and private investors will need to directly see the benefits of efficiency gains in service dleivery; income generated from advertisements; and any additional value offered by data, analytics, and insights for the services enhanced or made possible. One idea may be to trial ideas within potential innovation districts’ (or Business Improvement Districts (BIDS)) in metropolitan areas, where public infrastructure and private enterprise are both concentrated allowing for a microcosm approach to pave the way for wider city coverage.

By ensuring a collaborative financial approach which takes into account the needs of the public and private sectors, local authorities can ensure the transformative digital developments they pursue truly yield economic and social benefits for every citizen, business, and public authority that will inhabit and utilise the future Smart City.

IntechnologyWiFi’s integrated connectivity, data, communications and engagement platform for towns and cities can provide the perfect platform from which to progressively move towards a Smart City, encouraging collaborative financing and the gradual buy-in of public and private investors alike. To find out more about our unique platform for Smart City technology, or to learn more about the issues discussed in this topic, please get in touch.

Natalie Duffield

Natalie has spent 20 years working in the IT and Telecommunications industries alongside leading tech entrepreneur Peter Wilkinson. A confident, tactical, strategic thinker, and a dynamic CEO, Natalie has experience in a wealth of areas, including managed services, cloud computing, hosted services and outsourced infrastructure, data centre space, virtual server storage environments, telephony and networks.

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