FUNDING SMART CITIES
According to a Deloitte report, 41% of smart cities opt to combine public and private financing when it comes to smart city initiatives. While generally the most feasible way to raise funds, this approach requires that city planners appeal to the agendas of both the public and private sectors.
To accomplish this, officials need to develop a plan for measuring ROI that satisfies government requirements and meets the financial expectations of private investors.
41% of cities engage Public-Private Partnerships for smart city initiatives.
In a new report, Navigant Research has looked at the smart city market, and identified the some key funding models that have started to make it tick. Here, we consider each, as means to solve 21 century urban challenges, and ask obliquely if any of them will bring intelligence to cities, beyond just a few noisy outliers
FUNDING A SMART CITY PROJECT
A public-private partnership, declined as PPP in Europe and 3P / P3 in North America, is a cooperative arrangement between two or more public and private sector entities, where the financial risk is loaded on one side of the deal, typically towards private enterprise.
PPP / 3P deals have been employed as a standard financing instrument by governments across the globe, particularly as a way to fund major public infrastructure projects during the last 30 years. The structure of the model, and the allocation of risk, varies considerably, depending on partners and applications.
In the smart cities space, it is the most common and, as yet, most effective tool for governments and suppliers to push forward with their projects. “They are all over the place, in many smart-city application areas, and they come in many different flavours,” says Ryan Citron, senior research analyst at Navigant Research.
“It is essentially just a contract between a public authority and private supplier that defines a way to work together, but the definition is pretty loose.” The financial risk is largely assumed by the private sector, he notes, so tax payers “aren’t on the hook” if something goes wrong.
In smart city deployments in the US, the financial burden assumed by the private sector has been greater, simply as state funding has been less. In Europe, most smart city projects have retained a stream of funding from the European Union, typically via its Horizon 2020 programme, pushing research and innovation in the region through to 2020.
The upside for the private sector is the chance to secure major regional and national infrastructure deals, only with the sting of bank-rolling such projects through their formative years. Key incentives are built into PPP / 3P deals by governments in order to justify the investment for the private sector.
Energy Savings Performance Contracts
As discussed above, PPP / 3P models are hugely varied; at one extreme, they effectively result ‘energy savings performance contracts’ (ESPCs), where the financial incentives are effectively swapped for a share of the energy savings achieved by the tech upgrade.
In the smart city space, ESPCs have become the default tool for getting smart buildings and smart street-lighting projects off the ground. The model works so buildings are retro-fitted with energy control and management systems, and whole cities are afforded brand new lighting infrastructure, without making any capital investment.
Instead, they relinquish their energy savings until the supplier recovers their own costs. “It uses the future energy savings to fund the investment. Once the energy savings pay off the initial fee, the city starts to reap the benefits,” explains Citron. For street lighting, vendors reckon cities can save 70 per cent of their energy and maintenance costs by combing connected LED lights and control systems, and make the money back in a few years.
A lot of companies are telling cities they don’t have to pay anything. They’re saying: ’Your paying $10 million per year in electricity costs for lighting; put our system in and save $7 million. You can have it paid off in three years, and save a tonne of money every year after that.’” The ESPC model has effectively made street-lighting the poster child for smart city applications. Cities like the model, too, because the supplier is the one penalized if targets are not met, removing risk almost completely.
Investment Recovery Through Marketing/Advertising
The idea cities and enterprises will be able to monetize the data gathered on their city streets remains just that – an idea, locked in pilot mode in most cases. The idea an open data platform, in a smart-city control centre, will spark a new economy of local innovators is appealing, but hard to grasp.
Either way, these more expansive smart city concepts invariably hinge on the a hard ROI, probably realized by upgrading the street lights. Most experiments in the market only exist because the business case for street lights is so clear.
There is one alternative, however; the well-trailed LinkNYC project in the US, which is seeking to convert 7,500 old pay-phone booths across the five boroughs of New York City into digital kiosks. The plan was to spend $200 million. City Hall did not have to pay a dime. The cost – and then some – would be recovered through advertising, to the tune of $500 million over 12 years. This is the funding mechanism for this project.
Around 1,600 kiosks are in operation, offering free, fast and secure (gigabit) Wi-Fi to passers-by, push-button connections to emergency services, free USB charging, tethered Android handsets for free calls, and touchscreen access to city info and services. Five million people have stepped into the kiosks so far, reckons CityBridge, the consortium behind the project.
The payback for the city is connectivity and accessibility. The model has been picked up by electric vehicle (EV) charging companies, too, notes Citron, offering advertising space on their charging stations to be able to make a return and offer free charging.