Bridging the Smart City Funding Gap

Despite positive signs for the future of the smart city market, funding inevitably remains the biggest challenge to large-scale adoption. Despite considerable effort by the public and private sectors, the task of establishing common models for innovation financing that can easily be deployed at scale across multiple cities has proven difficult. The financial challenges have, of course, been increased by the devastating effects of COVID-19 on city operations and revenue.

However, new approaches to smart city funding are emerging. According to private equity firms and organizations like The World Bank, there is no shortage of capital to support smart and sustainable city programs; however, there is a shortage of good, investment-ready projects. Improving this situation requires more robust capacities in government to support the design, proposal, and management of suitable projects. The finance sector also needs to better understand the specific opportunities and challenges presented by urban innovation projects.

Innovation in Smart City Finance

Guidehouse Insights’ Ecosystem Strategy for Smart Cities: Business Model Innovation Beyond the Status Quo report explores some new developments transforming smart city funding. The report identifies four main areas of innovation:

• Public Sector Funding Innovation and Capacity Building: Cities are exploring new ways to finance innovation and improve infrastructure and services and additional support is provided by state and national governments. In the UK, Bristol launched City Leap, a public-private collaboration that aims to deliver £1 billion ($1.3 billion) of investment toward Bristol becoming a zero-carbon smart energy city by 2030.
• Private Sector Smart City Investment: A growing number of private equity firms are considering smart city opportunities. They are working with cities and other stakeholders to develop new forms of public-private partnerships for smart city investment. Aurora, Illinois, is working with Smart City Capital on a $300 million public-private partnership to accelerate smart city innovation. Itron is working with Key Equipment Finance to offer multiple finance mechanisms and business models to cities.
• Asset-Based Value Creation: Cities have been reassessing city infrastructure and services to create new value either in terms of hard or soft benefits. The deployment of 5G networks, for example, highlights the value of city assets and the importance of connectivity to the economic and social development of cities. Sacramento, California, is partnering with Verizon to enable 5G deployment and to develop an ambitious smart city program spanning a range of city applications in areas such as traffic management and public safety.
• Platform Innovation: City Internet of Things and data platforms can support multiple service delivery options and cross-sector collaboration. Public-private partnerships can use platforms for incremental deployment and service innovations that also incorporate new finance models. Valencia, Spain, has developed an integrated platform to support its smart city strategy, which also includes a strong focus on digital innovation across all procurement programs.

Cities Are at the Heart of a Green Digital Revolution

There is growing recognition that more sophisticated approaches to value recognition and risk sharing provide better frameworks for aligning multiple stakeholders on projects that can deliver significant social and environmental benefits. The technology foundations to support this transformation are largely in place. The challenge now is to realize the combinatorial benefits across integrated value chains and the use of adaptable platform solutions.

A post-pandemic alignment of city objectives, national, and international priorities, and a growing commitment to sustainability and equity in the technology and finance sectors, offer tantalizing prospects for the transformation of urban services. In the process, cities can become a catalyst for what the economist Carlota Perez has called the techno-economic paradigm shift necessary to realize the full potential of digital and green technology.