• COVID-19
  • Finance Investing
  • Business Models

Charting Cities' Financial Fallout from COVID-19

Grant Samms
Feb 11, 2021

Guidehouse Insights

As soon as it became apparent that the coronavirus outbreak would be more than passing turbulence for the global economy, municipal governments worried over financial consequences. Concerns over reductions in tax bases led many cities to project dire budget shortfalls and announce defunding of some programs in favor of keeping core operations afloat. These pullbacks could include smart city programs in the near to midterm as has been seen in New York. However, a more complete picture of financial impacts has emerged that sketches out a few likely avenues for financial recovery.

A recent global survey by United Cities and Local Governments (UCLC) confirmed that cities are facing increased financial stress as a result of pandemic. Among the most deemphasized budget areas are public works and infrastructure investments—sectors that are core to many smart city projects. Cities of all sizes and across all world regions have made public that deep cuts will need to be made into core municipal functions without substantial aid; however, there are signs that impacts may not be as dire or universal as previously thought.

While subnational governments around the world have been preparing budgets, many have found that COVID-19-related financial impacts are not as severe as previously forecast. Many state governments in the US have announced that their revenue is higher than previously thought, with some even forecasting surpluses. Of the cities surveyed by UCLC, one-third announced they will not cut major planned projects, and another one-third expects only temporary delays.

Financial Paths for Smart Cities

These seemingly conflicting reports signal that the pandemic's financial impacts are mixed in their severity and distribution. They also sketch paths for how smart city programs might move forward. Most directly, top-down stimulus spending could prove to be a funding avenue. North American, European, and Asian governments have announced large stimulus packages. This stimulus, coupled with the advantage of leveraged central banks, means that public investment in physical infrastructure, digital systems, connectivity, transportation, and community resilience efforts are likely. As these sectors are typical hubs of smart city activity, smart city programs focused on these areas may get a boost in the next few years.

Flexible Financing Models Are Powerful Options

Private industries that have developed X as a service (XaaS) or public-private partnerships may also find growing demand for their businesses. Cities short on cash, but still under public pressure to adopt emerging trends, have favored financial models allowing them to install infrastructure with either reduced overhead or as a simple-to-budget package. Several US mayors have identified public-private partnerships as a specific strategy of importance in their COVID-19 recovery plans.

Flexibility in financing models was an emerging trend for smart cities before the pandemic took root. The asymmetric financial pressures the pandemic is introducing is only likely to accelerate that transition. Helped along by national and extranational stimulus, private funding models like XaaS and public-private partnerships are likely to increase as pandemic recovery begins.