Navigant Research Blog

Urban Population Growth Drives the Need for Smart Cities

— July 15, 2014

The latest update from the United Nations on global urbanization trends is a powerful reminder of the most important of all drivers for smart city development: population growth.  World Urbanization Prospects, the 2014 revision reaffirms the core findings of previous studies but also further highlights the dramatic changes that will occur over the next 3 decades.

Today, the world’s urban population is close to 3.9 billion.  It will reach 6.3 billion in 2050, by which time two-thirds of the world’s population will be living in cities.   Nearly 90% of the increase in urban population will occur in Africa and Asia, and three countries alone – China, India, and Nigeria – will account for 37% of the 2.5 billion new urban dwellers.  Although more than half of the world’s urban citizens live in Asia today, the continent is only 48% urbanized and only 40% of Africans live in cities.  By 2050, Africa will be 54% urbanized and Asia will have reached 64%.

Percentage of Population in Urban Areas: 1950-2050

(Source: United Nations)

China and India Focus on Urban Infrastructure

China’s response to these pressures has been well-publicized.  The central government plans to invest up to $1 trillion in urban infrastructure during the 12th Five-Year Plan.  China’s Ministry of Housing and Urban and Rural Development (MOHURD) is currently assessing plans from 193 cities that are competing for up to $70 billion in investment to smart city development programs. In March 2014, the Ministry of Finance released details about the National New-type Urbanization Plan (2014-2020).  The government has stated a desire to develop a more inclusive path to urbanization that will benefit more citizens, improve the quality of life, and reduce the environmental impact of new developments.

India has taken longer than China to embrace urbanization as part of national policy.  As a result, despite the rapid growth of cities, like Mumbai and Delhi, and the global role of Indian technology suppliers, investment in the urban infrastructure has lagged economic development.  After decades of attempts to hold back the tide in favor of the traditional role of rural communities, there is a now a greater focus on the needs of the expanding urban population.

100 New Cities

India’s main smart city initiative to date has been the Delhi Mumbai Industrial Corridor (DMIC).  The development is intended to spur manufacturing and urbanization across a broad swath of northern India, with seven new cities planned and a total investment of $90 billion.  The new Indian government elected in May 2014 has put urban development at the core of its program and declared a target of building 100 new cities by 2022.  It has allocated around $1 billion for the program in its first budget.   According to M. Venkaiah Naidu, the new urban development minister, the planned cities will employ the latest technology and infrastructure, including advanced waste management and transportation systems.

The vast expansion in the urban population and growing expectations among city dwellers for better quality services and infrastructure will drive demand for smart city solutions across Asia Pacific over the next decade.  Navigant Research’s latest Smart Cities report estimates that a total of $63 billion will be invested in smart city technologies in Asia Pacific between 2014 and 2013, more than one-third of a global investment of almost $175 billion.

 

Smart Cities Seek Viable Financing Models

— May 21, 2014

It’s almost a truism to say the biggest barrier to implementing smart city programs is access to finance.  The same can be said of almost any large-scale capital project, particularly those involving public infrastructure.  Smart cities face the additional challenge of assessing the costs and benefits of new technologies and the uncertainties introduced by new operating models.  Fortunately, a growing range of financing options is available to cities as the financial sector comes to understand the benefits and risks of these new projects better.

A useful resource for cities perplexed by funding options is the Smart Cities Financing Guide, released by the Smart Cities Council (SCC) in association with Arizona State University.  The report assesses 28 different financial tools that are potentially available to city leaders, from the well-established use of municipal bonds to advanced financial models, such as securitization (now notorious for its role in the global recession of 2009).   Several different forms of performance contracting and green deals that have become available in recent years are also covered.

Not Available in All Areas

The report mainly focuses on financial tools available in North America, but similar options are usually available in Europe (if sometimes under different terminology).   Financing Models for Smart Cities, a guide produced by the European Smart Cities Stakeholder Platform, provides more detail on European options.  European cities also have access to additional support from the European Union.

However, not all of the potential financial tools are available in all regions, countries, or even in all states.  As Navigant Research’s report, Smart Cities: Asia Pacific, shows, even in China, with its huge infrastructure investment, financing for smart city projects can be difficult.  Cities in Asia often have fewer options for raising funds than their European or North American counterparts.

Finance and the Cloud

Smart city projects also vary widely in investment requirements and the length of time over which benefits are accrued: from a short-scale focus on the outcomes of social programs to 100-year-plus expectations for a railway infrastructure.  As the SCC guide stresses, cities should consider a range of financing options.   They should also look at consolidating requirements to achieve greater scale where this fits the preferred financial option.  On the other hand, in some cases, it makes sense to go in the opposite direction and look at disaggregating projects in order to find the right financial tool for each component.

Funding innovation can take other forms, of course.   One area not pursued explicitly in the SCC report is the change in operational models enabled by new technologies.  The most important of these is the emergence of cloud-based services.  For smart cities, cloud computing offers a cost-effective and scalable infrastructure for the delivery of new services, as well as important financial advantages – notably, shifting investment costs from capital expenditures to operating expenditures.  Cloud computing, therefore, makes it easier to establish a scalable and adaptable commercial model for the infrastructure services being provided.  Another opportunity for cities to maximize the value of their assets is to open up data resources to third-party developers.  However, crowdsourcing and open data can’t provide the resources for large-scale infrastructure, such as new transit systems or smart water networks – which is where the approaches examined in the Smart Cities Financing Guide become essential.

 

Innovation Is Booming in the Water Industry

— April 9, 2014

As part of the events to mark World Water Day, the United Nations (UN) has launched a new report highlighting the challenges of ensuring an adequate global water supply over the coming decade.  In particular, the World Water Development Report focuses on the growing interdependency of water and energy.  The report looks at the water industry’s energy requirements for production, distribution, and treatment, as well as at the growing demand for water resources from the energy industry.

We have written about the impact of the growing global demand for water before, but the World Water Development Report yet again highlights the challenges ahead.  According to the report, water demand will increase by 55% by 2050, with the biggest impact coming from the growing demand from manufacturing (400%), thermal electricity generation (140%), and domestic use (130%).  More than 40% of the global population is projected to be living in areas of severe water stress through 2050.

Countries, cities, and communities need to improve their ability to assess and plan for future water needs.  However, developing new water supplies, storage facilities, or treatment plants will remain a hugely expensive endeavor, and so the industry must look to technologies that can mitigate the need for capital investment by improving the efficiency of existing systems and maximizing the benefits of new investments.  For this reason, we are seeing a host of innovative technologies and solutions targeted at the water industry.  Entrepreneurs and developers from the IT, telecom, and smart grid sectors are now looking to water as the next industry where they can make a major impact on the way the business operates.  This opportunity is attracting a wide range of technology and service suppliers, including established water metering vendors, water network engineering companies, water service companies, infrastructure providers, IT software and service companies, and a variety of startups and innovators.

The recent World Water-Tech Investment Summit in London gave me a good opportunity to survey a range of companies.  Among a host of other innovators at the show were companies we looked at in our Smart Water Networks report, including TaKaDu, which has been pioneering the use of cloud-based analytics for leak detection.  Also present was i2O, which is providing water utilities with an intelligent pressure management solution that also uses cloud-based advanced analytics, but integrates them directly into the pressure management system.  Other companies new to me included Acoustic Sensing, a U.K. startup that has developed a new acoustic sensing solution to allow the rapid identification of structural defects and blockages in sewerage systems; Syrinix, another U.K. company that provides intelligent pipe monitoring systems for burst detection and pressure monitoring, among other applications; IOSight, an Israeli-based company providing advanced business intelligence and data management for the water industry; and Optiqua, which provides sensor networks for real-time water quality monitoring.

Keeping Afloat

While there is no shortage of innovation in the industry, it is still a challenge to find ways of investing in new technologies in a heavily regulated industry.  With no stimulus funding or mandated smart meter rollouts to boost the market, the industry needs to find other ways to finance innovation.  One option is the use of a software-as-a-service (SaaS) model to defer capital expenditures and reduce resource needs.  For example, both TaKaDu and i20 provide their software as a cloud-based service.  Innovative approaches to regulatory and investment programs will also be important.  In the United Kingdom, OFWAT is currently working with the country’s water utilities on the next regulatory pricing period, to run from 2015 to 2020.  The aim is to increase the ability of utilities to invest in water metering and other networks’ management technologies.

The smart water market is attracting a wide range of new players and presenting established players with the opportunity to expand their business into new areas.  Both sets of players face challenges in an industry that is hungry for change but also conservative in its operations and restricted in its financial options.  As stated in our Smart Water Networks report, while there are strong drivers for growth, the challenges of transforming a conservative industry faced with a physically and technically challenging deployment environment mean that the growth in this market will always be steady rather than explosive.  However, the direction of travel is clear.

 

U.K. Takes the Lead on Smart City Standards

— March 5, 2014

One of the important goals for smart cities in 2014 is the identification and development of appropriate standards to help drive innovation and cross-sector cooperation.  I’ve written previously about the City Protocol as a groundbreaking effort in this area.  Now the United Kingdom has launched its own smart cities framework.  Developed under the aegis of the British Standards Institution (BSI) and with the support of the Department for Business, Innovation & Skills (BIS), the standards have been developed by a group of stakeholders from U.K. cities, government, and suppliers.

Smart City Framework – Guide to Establishing Strategies for Smart Cities and Communities has been developed as a guide for city leaders developing a smart city strategy, with an emphasis on practical steps and a conceptual framework that will help them measure progress.  It draws on a series of workshops and stakeholder engagements over the last year, as well as best practices drawn from other international projects.  Significantly, it’s also based on the 29 submissions made by British cities for the £24 million ($38 million) Future City Demonstrator project, which was awarded to Glasgow in 2013.

I gave a presentation on the smart city market at one of the inaugural workshops for the new standard last spring.  At the time, I was impressed by the enthusiasm shown by both cities and suppliers, but I was also concerned that discussions seemed to be taking the initiative down well-trodden paths around local government processes and IT initiatives.  Important as these issues are, in isolation they do not capture the much broader opportunities or the challenges that the smart city concept presents.

Off the Trodden Path

Fortunately, the framework as presented goes a long way toward addressing those concerns.   It was even more reassuring to hear how the cities involved in early testing of the framework have been using it.  At the launch event in London at the end of February, smart city project leaders from Birmingham, Glasgow, Leeds, and Peterborough talked about how they have been employing the framework to build collaboration not only across city departments but also with a wide range of external stakeholders, including energy companies, water companies, and transport providers.  It has also helped boost their work on developing open data platforms and building developer communities to use that data to develop innovative applications for the city.

The framework is the latest in a number of programs to encourage smart city development in the United Kingdom.  In addition to the Future City Demonstrator program, the government has established the Future Cities Catapult, “a global centre of excellence on urban innovation” in London, and has launched an initiative to help U.K. businesses target a £40 billion ($64 billion) global smart city market opportunity.

Over the last 2 years, the United Kingdom has gone from being a laggard to a pacesetter in smart cities.  While other national governments are realizing the need to support urban initiatives, the United Kingdom is now helping to lead the way.  This is a significant step forward that should be of interest to all cities beginning their smart city journey.

 

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