Cleantech Market Intelligence
Smart Cities Seek Viable Financing Models
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.