Funding and financing strategies for smart cities

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.

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.

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