Perspectives

Funding and financing strategies for smart cities

Creative alternatives for funding tomorrow’s ecosystems

Smart cities require infrastructure modernisation—a high price-tag proposition that can be daunting for any city. See how innovative financing strategies are helping cities around the world transform vision into reality.

Funding and financing strategies for Smart Cities

Increased urbanisation, a focus on sustainability and citizen demand for smart services are driving cities to look to upgrade their infrastructure with smart technologies. Paying for those projects presents a significant challenge. Constrained by tight budgets, cities need to identify business models that can help to attract private sector participation in order to make the introduction of smart cities sustainable, viable and financeable

Several factors make it difficult to finance smart cities projects. One common obstacle involves technology risk: the project may be the first to deploy a particular technology, reducing investor confidence in the integration and usability of the technology in the absence of demonstrable proof of concept. It may also be hard to secure financing for a smart city project where it is difficult to monetise the benefits of the project.

For example, a project might offer a clear positive socio-economic impact, but there may be no way to assign a euro value to that benefit, including the potential to generate revenues.

Other impediments to financing include: projects that do not have a clear path to steady revenue; where the return on investment (ROI) is uncertain; and/or the unconventional nature of smart cities projects based on interconnectivity (of the Internet, Wi-Fi, fibre-optic cable, etc.) with physical devices and infrastructure, which often lack the traditional, single-sector focus that conventional financing favours.

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Lastly, the types of financiers that will generally understand smart cities often have an infrastructure background; however, their preference is for long-term projects. The shorter term nature of technology-related projects can be outside their remit or bring additional risk and challenges to smart cities projects that need to be considered. A key step in any smart city financing effort is developing a comprehensive strategic plan to capitalise on the project’s strong points. This can help to improve the initiative’s “investment readiness” and its access to finance. The plan should include a robust business model, a creative approach to funding and financing sources (finding new sources of revenue for projects and new business models for recovery and value capture), and innovative financing structures for investors.

We recommend that you explore our series starting with "The challenge of paying for smart cities" followed by articles of particular interest to you.

Innovative funding & financing to realize the smart cities vision

The challenge of paying for smart cities

Many cities are exploring ways to upgrade infrastructure with smart technologies, but paying for these projects presents a significant challenge: Introducing smart technologies on a wide-scale basis. Read more about ways increase the odds of success on large-scale smart cities projects by exploring the full range of options for funding, financing, and procurement.

Latest release: Smart cities funding and financing in developing economies 

For private sector and institutional investors, developing economies present significant challenges, including political, regulatory, macroeconomic, business, and technical risks. International development organisations (IDOs)—multilateral development banks, development finance institutions, bilateral donors—can offer developing economies critical support and risk mitigation through low-interest loans, equity investments, credit guarantees, and technical assistance.

The alliance approach to smart cities

The alliance approach the alliance approach is a creative financing model based on forming partnerships, procuring products and services, and providing governance to realise the promise of smart cities. The model enables governments to develop new partnership ecosystems and conduct flexible procurements, allowing municipalities to quickly test and deploy smart cities solutions first and then scale up solutions that provide real benefits.

Using public-private partnerships for smart city funding

This article examines creative ways municipalities are using private and non-profit participation to advance their smart cities agendas. We also distill lessons learned to help other cash-strapped cities overcome funding and financing barriers and move forward on smart cities projects.

Getting smart about financing smart cities: Start with these three steps

Cities ready for major infrastructure reinvestment and modernisation can embrace smart cities to become more secure, safe, resilient, and globally competitive. By championing smart cities, government finance officers can play a key role in urban reinvestment and modernisation, using fiscal policy, public-private partnership, and performance-based revenue models to enable the transformation to smart cities.

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Funding and financing strategies for smart cities

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