Finding the Money for Smart City Initiatives

FINDING FUNDING IS ONE OF two key challenges when it comes to implementing smart-city strategies, and the other is technical capability, according to a 2016 Smart Cities Council survey of more than 400 U.S. municipalities and state governments. Indeed, ask any city official about the biggest worry relating to smart projects, and most likely inadequate financial resources would be top of mind. Municipal budgets typically have little or no slack to allow for smart endeavors. And raising taxes to pay for it is usually not an attractive option, unless it is spearheaded by advocacy programs and the benefits are credibly articulated to residents.

As such, city administrations have to be creative about their finances, whether it means repurposing existing allocations, forging public-private partnerships with private investors, or cutting the costs of existing services through more efficient procurement policies. Wharton professor of finance and economics Robert Inman said there are ways for cities to get the biggest bang out of every taxpayer dollar. Since labor usually is the biggest cost, the city should make sure that labor costs are competitive for providing city services like education, police, fire, sanitation, health care and the like. On the revenue side, the city ought to levy taxes to closely approximate the benefits the taxpayer receives in the way of services.

George Atalla of consulting firm EY said municipalities are often “struggling” with finances because of a variety of reasons. Federal government funds for smart-city projects tend to be small relative to the need since these funds have too many claimants. Cities collect much less revenue by way of taxes compared to the federal government and their ability to raise more is limited. They face several constraints as well when it comes to getting funding from the private sector for city projects.

Monetizing the data that cities provide third parties through their APIs or datasets is an attractive opportunity to raise funds. However, no uniform approach is available for what data to share publicly, how much would be free and how much they would charge for the rest. Austin Ashe, general manager, intelligent cities at GE’s subsidiary Current, cited the example of a lender or a property developer getting access to data on foreclosed houses in California’s Bay Area from the county courthouse. The county might levy a fee that covers the costs of providing those records. But when somebody wants “extraordinarily granular information,” say about traffic patterns or pedestrian movement or environmental patterns or public safety, “just because it’s open doesn’t mean it’s free,” he added. “Cities will start working through policies that help them determine when to charge and when to just make it available to them and to the general public for free.”

To be sure, municipalities have decades of experience sharing revenue with private investors that fund public projects, such as an independent power plant. Atalla noted that “every country knows how the contracts are written; the private sector partner comes in and gets a long-term contract, and a share of the power that is produced. The whole scheme of the revenue stream has been sorted out.”

Compare that to a smart-city initiative, which does not readily offer an underlying asset that could serve as collateral to secure the financing, and thus might find it harder to get a backer. These are projects such as the deployment of sensors to manage traffic better, or installation of cameras for improved monitoring to ensure public safety, or putting sensors on trash bins to decide the right day to collect garbage and optimally route trash trucks to reduce costs, congestion and pollution.

Atalla said cities can get around those challenges by linking the payment to performance or the savings that the project achieves. For example, if the city can better manage its solid waste with sensors and algorithms to guide trash trucks, it would generate some savings. The city could come up with a plan to share those savings. Similarly, if the city is building more efficient roads and using sensors, it could find ways to measure the travel time saved and congestion avoided, quantify the results, and provide a share of it to the private- sector partner.

Sharing the savings with private sector partners is the most popular choice, according to Atalla. That method is used for services such as street lighting, traffic control and solid waste management because it is harder to measure their performance outcomes. That’s not to say that an economist would not be able to quantify the economic impact of time saved in traffic, he said.

Although examples are few of investors sharing in the outcomes from smart-city projects, Atalla pointed to models that have worked in other areas such as the rate of recidivism, or the number of ex-convicts who return to prison. The private sector partner that provides related services to felons such as education, employment training, counseling and so forth gets paid by an amount equivalent to the reduction in the number of people returning to jail. That method is called “pay for success,” or PFS, where projects are financed by so-called social impact bonds.

The first PFS project was implemented in 2010 by the HM Prison Peterborough, outside London. The project envisaged savings in the cost of running the prisons, and it offered investors a specified return for a 10% drop in the re-conviction rate over five years. Some 17 foundations financed the social impact bonds totaling £5 million ($6.6 million), but the drop in the re-offending rate fell short at 8.4%, according to a study of the project’s first phase by QinetiQ and the University of Leicester. Prison systems in the U.S. also have attempted such projects financed by social impact bonds, but have faced challenges in quantifying the outcomes.

Britt Harter, director of sustainability services at PricewaterhouseCoopers, said it is not easy for a city to create sufficient support for intangible or long-term benefits. “Anyone who approves a lot of money is going to take a lot of pressure for the approval, and it is important that what you get in return is seen as equally valuable,” he said. Often, disconnects exist on what that value is between decision-makers and the general public or experts. “Therefore, finding a way to create sufficient excitement and engagement for those less prominent or intangible benefits is important,” Harter added. “The right revenue lever is an open question — is it going to be financed by new taxes or by reallocation of existing funds? There is a lot of creative work that goes on with budgets in cities, but I don’t know if anyone has found a fully reproducible model.”

Governance issues also come into play and bring obstacles, Atalla said. For example, the mayor does not control the electricity provider, and so he or she is not in a position to demand better service. Similarly, the mayor also does not have direct control over the city’s department of transportation, and so persuading it to invest in better technology to reduce congestion is also a challenge. “The department of transportation might prefer to go out and build more roads.”

STRONG PROJECTS LURE INVESTORS

Notwithstanding those financing obstacles, projects with strong business cases do attract funding, as demonstrated by a much-cited project in Columbus, Ohio. The city’s plan for investments in connected infrastructure, electric vehicle charging infrastructure, an integrated data platform and autonomous vehicles won the 2015 U.S. Department of Transportation’s Smart City Challenge grant of $40 million. A total of 78 cities participated in that challenge, and the runners-up included Austin, Tex., Denver, Kansas City, Mo., Pittsburgh, Portland, and San Francisco.

A central feature of the Columbus project was to be inclusive by benefiting a broad swath of its citizens, such as reducing infant deaths by improving transportation to medical care. Other investors lined up after it won the DoT challenge: Microsoft co-founder Paul Allen’s philanthropic vehicle Vulcan Inc., which wants “to tackle the world’s toughest problems,” gave Columbus up to another $10 million. The city also got $90 million from other private investors for its smart-city projects.

Columbus committed to collaborating with the runnerup cities, and sharing best practices from its projects with other municipalities. All that encouraged more funding for smart-city projects elsewhere: In 2016, the Organization for Economic Cooperation and Development committed grants totaling $65 million for community-driven transportation projects in U.S. cities that use advanced technology. The resulting enthusiasm encouraged other cities to raise some $500 million from public and private investors.

The LinkNYC project in New York City is another example of an innovative financing model. Launched in 2014, the project goal is to bring free wireless internet coverage by repurposing some 7,500 old payphones in the city’s five boroughs over eight years. CityBridge, a consortium of investors that won the 12-year contract, is investing $200 million to install fiber and deliver gigabit-speed internet, which is about 100 times faster than the average public Wi-Fi. The ‘smart kiosks’ that replaced the old pay phones offers free phone calls to anywhere in the U.S. through a tablet, including access to 311, 911 and 411; maps and directions; USB charging ports and an encrypted public Wi-Fi network with customer privacy features built in.

The LinkNYC project is not financed by New Yorkers. CityBridge funds it entirely from advertising revenues, and shares half of that with the city government. Over a period of 12 years, the city would earn more than $500 million from the project, according to estimates. At last count, CityBridge has set up 1,200 smart kiosks across the city, according to Jeff Merritt, former chief innovation officer of New York. “The top achievement is the innovative business model and contract structure that incentivizes the service providers and vendors,” he said at the Smart Cities Week conference in October 2017.

“The LinkNYC model works because the city is trading something that it controlled that was valuable in exchange for services that were valuable,” added Harter. “If a city is looking to do something where it has nothing to trade or sell, that is when it can get to be more challenging.”

ANOTHER USE FOR STREET LIGHTING

Repurposing existing assets in smart ways could allow cities to implement innovative projects. For Austin Ashe, general manager, intelligent cities at GE subsidiary Current, the street lighting infrastructure in a city has big potential. A city usually has between 10,000 and 300,000 street lights. These are valuable assets because they’re everywhere and they already have a power supply built into them. They also have a unique elevation of about 30 feet or 10 meters.

“We saw an opportunity there to repurpose that infrastructure by creating essentially a smartphone- equivalent that can sit on that street pole,” said Ashe. Many cities that want to go smart tend to install sensors on more than a dozen disparate systems — one each for smart parking, smart traffic, environmental management, pedestrian safety or gunshot detection and so on. All of these consume large amounts of time, energy and money to procure, install and manage. Consolidating them on streetlights, in one device and one platform is what smart street lighting delivers, in addition to cost and time savings, he added.

This digital infrastructure on streetlights also provides “a flexible smart platform” on which to build apps, Ashe said. For example, it could have an operations application for the police force around gunshot detection, or for the traffic department to use data analytics to ease congestion, save energy and increase public safety with dynamic operations, where sensors detect the need to turn on lighting. Apps could help citizens do such things as find open parking spaces or report a problem. The data extracted from these smart street lights can be leveraged through APIs that combine city operations with citizens’ needs to build applications.

While cities grapple with their funding challenges, larger issues sometimes seize the agenda. Atalla referred to a larger debate underway in smart-city circles on the sharing of powers and responsibilities between the city and the central government. “Regardless of which country you are in, people identify themselves more with their cities then with their country,” he said. For example, people living in Dubai associate themselves more with the city of Dubai than with the country, the United Arab Emirates.

That sentiment creates conditions for turf battles. “You pay taxes to the central government but the city is in the frontline of providing services.”