Get smart about financing smart cities
Part one in a series on financing smart cities
US cities are in need of major infrastructure reinvestment and modernization. By embracing new smart city models, we can make our cities more secure, safe, resilient, and globally competitive. Government financial officers can play a key role in enabling this transformation using fiscal policy, Public Private Partnership, and performance-based revenue models. By championing the creation of smart cities, government finance officers can drive urban reinvestment and modernization.
- The promise of smart cities
- Creative approaches are required
- Advancing smart cities: Three key steps
- Get on a smarter path: New partnership models for smart cities
- Meet the authors
The promise of smart cities
There is growing momentum around the smart city as a viable model for rejuvenating urban economies and societies. Smart cities leverage an infrastructure powered by modern technologies such as the Internet of Things, embedded sensors, and cloud-based services. Because of this, they are more resilient and environmentally friendly. Perhaps most importantly, smart cities can help government leaders reduce costs and increase revenues while better serving citizens.
Creative approaches are required
To make the vision of smart cities a reality, government finance officers will have to find creative alternatives to traditional infrastructure financing models. Under their stewardship, municipalities can seek out cross-government collaboration and innovative partnerships that provide new sources of investment. Public–private partnerships (PPPs), revenue sharing agreements, and pay-for-performance arrangements are examples of resourceful new approaches to funding and financing smart cities. Investment vehicles like these go beyond traditional debt instruments to ensure less risk and more reward for all stakeholders.
Advancing smart cities: Three key steps
Government financial officers have an important role to play in the development smart cities. Here are three steps state and city leaders should consider as they look to finance smart city initiatives:
- Support fiscal incentives, PPPs, and qualified infrastructure bonds specifically focused on smart city requirements. These policies can reduce the near-term cost of investment in enabling technology while balancing the risks and rewards.
- Incorporate performance-based approaches for revenue sharing into delivery models for smart city systems. This way, both the public procurer of services and private-sector investors share the spoils from efficiency gains, advertising-generated income, and value-added smart city analytics.
- Encourage active federal, state, and local collaboration. This opens the door to potential funding for special-purpose vehicles and innovation districts.
Get on a smarter path: New partnership models for smart cities
Regardless of the technology application, a cross-cutting theme in smart city infrastructure investment is the re-allocation of risk and reward between the public and private sectors. Federal, state, and local leaders will increasingly encounter new partnership models for front-end investment and revenue sharing, including pay-for-performance related to service improvements or access to services.
Even resource-constrained federal, state, and local entities can participate in the emerging smart cities market with the oversight of their financial, accounting, and infrastructure leaders. As in the case of the Smart Cities Challenge sponsored by the U.S. Department of Transportation (DoT), winning city Columbus, Ohio, received a $40 million DoT grant, along with $10 million in support from Vulcan Philanthropies. The private sector also stepped forward with $100 million in investment. Collectively, this investment will be used to transform how transportation is used in Columbus. 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.
By thinking outside the box and partnering in new ways, even resource-constrained federal, state, and local governments can participate in smart city programs. And as more municipalities pursue smart city strategies, valuable lessons and best practices will enable the success of future adopters.
Download our new report Funding and financing smart cities—from the Deloitte Center for Government Insights, published in the Association of Government Accountants’ Journal of Government Financial Management—to learn more about smart cities in action and the innovative financing strategies behind them.
Copyright 2017. Association of Government Accountants. AGA® and the Journal of Government Financial Management® are registered trademarks. Republished with permission. All rights reserved.
Meet the authors
Steve Hamilton is a senior manager at Deloitte Advisory LLP in the Emerging Markets Practice based in Washington, D.C. He has more than 10 years of experience providing market, economic, strategic planning, and transactions support for large-scale infrastructure projects worldwide, including cities, special economic zones, ports, and airports. For Deloitte, Steve is focused on urban development and SMART cities. He is currently leading a SMART Border connected cities project on the US-Mexico border and a project in Morocco that seeks to implement a new industrial land development and governance strategy for the country.
Ximon Zhu is a senior consultant at Deloitte Advisory LLP in the Emerging Markets practice in Washington D.C. He has more than seven years of experience providing strategy consulting, capital planning, infrastructure finance, project management, and transaction support services worldwide. Ximon recently led a project for a development finance institution focused on partnerships to catalyze private investment in sustainable infrastructure projects for its global urban portfolio.