Deloitte – Smart cities investment requires some “creative thinking”

SUMMARY:

A report released this week by Deloitte suggests US cities need major modernisation programmes, but funding and financing smart cities needs new models.

The concept of smart cities has been prevalent in the IT industry for years now. However, if you asked citizens if they thought their city was ‘smart’ (and by that, I mean using technology and data to create more efficient models of operation), it’s likely most would say no. We as citizens see very little evidence of it on a day to day basis.

A new report from Deloitte, which focuses on US cities, but has plenty of relevance for the UK market too, highlights that one of the key challenges in gaining traction for projects could be the need to establish new investment models for the infrastructure programmes.

This is largely because the idea of ‘smart cities’ can tap into many areas of investment – infrastructure, technology, social programmes – so where is the funding coming from? However, the report also highlights interesting opportunities for public-private sector partnership models that make use of existing assets held by the city to generate further revenue.

And if city, state and federal government don’t figure this out, it could lead to big problems down the line for citizens – particularly as populations are migrating more and more towards city-living. The report states:

Not only is the safety and security of our citizens and businesses at risk as infrastructure assets age and fall into disrepair, but so too is the broader economic well-being and global competitiveness of our cities and our country.

Undertaking a broad-based smart city reinvestment and modernization program will help reduce costs, maximize revenue potential, and improve citizen well-being through the deployment of cutting-edge, technology-enabled infrastructure that is more environmentally friendly and resilient.

The challenge

A smart cities initiative tends to rely upon connecting up a city through the use of sensors and superfast broadband, to collect data that can be used to analyse the efficiency of certain functions, as well as monitor the broader social environment. However, it could also include ride-sharing services and autonomous vehicles. Essentially, anything that uses technology to help a city run smarter.

Deloitte states:

These technologies force city managers, planners, and financial and accounting managers to consider or rethink issues such as citizen data capture/management, revenue models, cybersecurity, urban density, transportation networks, and land-use allocation. “Smart cities” consist of investments in human and social capital, traditional infrastructure, and disruptive technologies that fuel sustainable economic growth and a high quality of life with the wise management of natural resources through participatory governance.

The report states that the market is diverse and complex, due to the cross-cutting needs of cities. In addition to this, because the concept of smart cities relies on inter-connectivity between infrastructure systems, it functions “laterally across sectors”. In other words, smart cities don’t just require infrastructure projects, or just require technology projects, it requires broader thinking that cuts across all these different disciplines.

And this creates challenges for investment, as the rigid rules of public sector procurement haven’t traditionally had to think in this way. If you needed a new building, you hire a construction company. But now you might need a construction company, plus a broadband provider, plus a sensor company, plus an analytics proposition – it’s complex.

Deloitte states:

Addressing the challenge of investing in smart cities programs requires creative thinking that departs from traditional models of infrastructure finance.

Some inspiration

Deloitte believes that financial leaders at the federal, state and local levels need to embark on some smarter thinking about how to get these projects underway. The report states:

As a first step, this includes supporting policies such as fiscal incentives (including tax abatements), PPPs, and qualified infrastructure bonds specifically focused on smart city requirements. The public sector should encourage private-sector investment in new smart city partnership models that will reduce the near-term cost of investment in technology-enabled infrastructure (in an era of public resource constraints), while ensuring any risk and reward considerations are appropriately balanced.

As a second step, new performance-based approaches for revenue sharing should be built into delivery models for smart city systems, whereby the public procurer of services and the private-sector investors share in the value of efficiency gains in service delivery, advertising-generated income, and revenue from value-added analytics services.

A critical third step on the road to smart cities is active federal, state, and local collaboration. This includes the potential to fund special-purpose vehicles and align on potential innovation districts within major metropolitan areas (even military bases).

The report includes a couple of active examples in the United States that could provide inspiration for cities elsewhere that are looking to get their smart initiatives underway. For instance, the US Department of Transportation sponsored a Smart Cities Challenge, which saw Columbus, Ohio receiving $40 million to help how transport is used in the city.

However, following the grant, Columbus also received $10 million from Vulcan Philanthropies, as well as $100 million investment from the private sector. Deloitte states:

One area of focus is ride sharing that can better connect lower-income communities to their city, which can result in economic benefits, citizen inclusion, and potentially better health outcomes. The Columbus example shows that the private sector is willing to invest in pilot projects as an up-front investment or loss leader, but will expect to participate in longer-term upside and downstream implementation opportunities.

In a separate example, New York City recently began deploying LinkNYC6 – a $200 million project designed to replace legacy phone booths with 7,500 digital kiosks throughout the city. Each kiosk will provide citizens with free high-speed Wi-Fi, along with wayfinding services for tourists and sensors to monitor environmental data.

The project is being funding by an “innovative partnership model”, which is sponsored by a consortium of companies that include Qualcomm, Civiq and Intersection. Under this model, the city allows the consortium to install the kiosks (at no cost to the taxpayer) and collect advertising revenue, which is shared with the city at an agreed-upon rate. The report states:

The program is expected to generate $500 million in advertising revenue during its 12- year implementation period. Such funding models repurpose existing physical assets, bring in private-sector capital and expertise, and ultimately create new sources of revenue through data collection and citizen engagement.

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