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How to Finance a Smart City

by Joshua New
Smart City

The Internet of Things is reshaping cities around the world. Smart bridges can alert engineers in real time when their structural integrity changes, potentially avoiding a catastrophe. Smart transportation infrastructure can reduce commute times, emissions, and fuel consumption with connected, synchronized traffic signaling. Even smart trash cans can help cities operate more efficiently—Barcelona will save $4.1 billion over the next ten years thanks to this connected technology. There is no question that the Internet of Things is transforming cities for the better—improved services, more resilient, and a better quality of life. However, progress towards smart cities is not being made as quickly as it could, due primarily to a lack of financing. Upgrading public infrastructure can be an enormously costly endeavour, but when taking into consideration the enormous potential benefits of the Internet of Things, the question changes from “is it worth it?” to “how can we start?” City financing of smart infrastructure is no simple task. Fortunately, city leaders now have several resources at their disposal to tackle this problem.

The Smart Cities Financing Guide, developed by the Smart Cities Council, an advocacy group devoted to accelerating smart and sustainable cities, and Arizona State University’s Center for Urban Innovation, describes 28 municipal finance tools at the disposal of city leaders. These tools fall into four categories: government-based finance options (traditional government financing, typically with the use of bonds or loans), development exactions (when the private developer is required to pay fees determined by the impact of their development), public and private options (when governments and private companies share the costs and benefits of a project), and private sector leveraging (when the government makes it easier for private lenders to contribute funds, increasing the overall amount of capital available). Each tool in the report has been used by a city to adapt to the challenge of upgrading municipal infrastructure at a time when financial support from federal and state levels is not always a viable option due to limited budgets. While not all financing tools are available or viable in all jurisdiction, this guide is a useful reference for city and local leaders to find both traditional and nontraditional financing arrangements that will ultimately provide enormous benefits to their constituents. One tool outlined in this guide is value capture, which lets the government recoup some of the economic value added to the private sector as a result of a public project. The guide references Fairfax and Loudoun counties in Virginia, which help fund transportation infrastructure projects with a tax on the increased property value of affected commercial and industrial properties created by the project.

The Financing Models for Smart Cities report, developed by the European Innovation Partnership for Smart Cities and Communities’ Smart Cities Stakeholder Platform, an initiative devoted to fostering an idea exchange and solutions to make cities more efficient and growth-friendly, also provides a wide variety of financial mechanisms and models that can help cities overcome barriers to financing the Internet of Things. The strategies identified in this report serve to reduce the real and perceived risks of investment in smart infrastructure, as well as developing long-term and sustained financing to ensure that investing in smarter cities is an ongoing process. With a particular emphasis on financing strategies for the deployment of energy efficient technologies, this guide serves as a toolkit for city leaders to help take on projects that might not be otherwise bankable. Some tools outlined in this guide are interest subsidies, or “soft loans”, that typically have low interest rates or extended payback periods, and revolving funds, which refer to loans that are repaid with revenue earned from a project, which is then reinvested into new projects—a particularly valuable tool when liquid capital is scarce.

Public-private partnerships are touted by both guides as a viable means of delivering benefits from the Internet of Things in underserved and underfinanced areas. Until recently, about 650 million liters, or 50 percent, of water in Mumbai was wasted due to dated and faulty infrastructure, and the city’s only method of addressing the century old water distribution system was to simply plug leaks as they arose. Thanks to a partnership with Itron, the largest U.S. maker of metering devices, Mumbai was able to install smart metering technology and reduce the amount of water lost by 50 percent. This was accomplished with the same level of resources and same capital investment that Mumbai would spend on traditional methods of addressing water infrastructure problems.

These solutions are not one-size-fits-all, but when they work, the principles behind them are scalable and transferable. For example, Itron is now in the process of installing, or has contracts to install, smart metering technologies in New Delhi and Bangalore, and has had similar successes in Africa. As entrepreneurs build new applications for the Internet of Things, there should be no shortage of opportunities for city leaders to create partnerships and leverage other financing tools outlined by these guides to make the their cities smarter.

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