4.1.2 Financing smart cities
One of the greatest challenges facing smart cities is how to finance them. Smart infrastructure requires a large volume of investment. Financing can be a huge challenge due to increasing pressure on city government finances and the fact that the value proposition – the evidence that smart projects will deliver promised resource efficiencies and cost savings – is not always clear.
A working group on smart city infrastructure has been established by the UK Smart Cities Forum. Its first report is Task & Finish Group for Infrastructure, Business Models, Finance and Procurement (Smart City Forum, 2015).
The aim of the report is to identify and address barriers to development and deployment of smart city technology and infrastructure in areas such as health, energy and mobility. It explores mainstream approaches to financing and supporting new infrastructure in the UK, and their relevance to smart and integrated projects, such as guarantee structure, recoverable investment funds, municipal bonds and crowd-financing.
The report finds there is no one-size-fits-all approach in financing smart infrastructure: numerous financing tools are deployed, depending on the nature of the projects and their stakeholders, their size, scale and risk levels.
Risk plays a critical role in decision making for public and private investors. It is crucial to understand the nature of risks in smart city projects and how they differ from traditional infrastructure projects. High upfront costs, unfamiliar risks, smart city business models that are not fully understood by cities or investors, and new types of partnership between public and private sectors all need further work.
The report also finds that the procurement process plays a critical role in financing smart cities. Decisions made when procuring new infrastructure and services can have a long-lasting impact on the sustainability of a city because they frequently involve long-term contracts. There’s also a high expectation for cities that smart projects should be able to demonstrate immediate cost savings. But the solutions are often still in development and have only been piloted at small scale, so evidence of the achievement of efficiencies and cost savings are likely to take time.
Public procurement of ICT solutions is also often associated with high risk and many city governments are not equipped to take on the complex tender specifications or the due diligence to ensure the best value for money. Growth of new business models, such as the sharing economy model, also requires new approaches to procuring services.
You might like to make a note of any key points you’ve learned about in relation to financing smart projects, as they’ll be relevant when you fill in the Smart Cities Project Business Model Canvas in Weeks 5 and 6.