Paying for Smart Cities

As cities learn more about smart technology and the promise it holds for better management of their urban centers, the issue of funding raises concerns about the viability of implementation. How will they pay for the huge investment to support smart city initiatives? Likely, the cost to implement city-wide, smart technology far outweighs the available municipal dollars in the operating budget. In fact, funding is the most significant hurdle to face when deploying smart city projects according to Black & Veatch’s 2017 Smart City/Smart Utility Report, whose survey data indicate that only 16% of municipalities can self-fund a smart city initiative.

Many cities therefore, are looking for creative financing to help fund their efforts. One of the more popular ways being considered is the use of public-private partnerships (PPPs). Public-private partnerships have been around for a long while – as early as the 1400’s in Europe, and presumably came to America along with European settlers. Despite the partnership’s longevity, its renewed popularity as a current funding possibility is gaining speed. Black and Veatch agree. Overwhelmingly, they cite PPPs as the most effective financing model for smart city initiatives by both government entities and smart service providers alike (74.5%). The second and third most effective financing models for smart city initiatives are government grants/subsidies (51.9%) and tax incentives (41.7%), respectively.

There are three basic funding models for the Smart City expansion within the public-private partnership structure according to IHS Markit Research.

“Smart City projects are typically deployed via partnerships between the public and private sectors. The main business models include build-operate-transfer (BOT), build-operate-comply (BOC) and municipal-owned-deployment (MOD).

The most common model is BOT, where city planners work closely with an external private partner that, in turn, develops the services and deploys the necessary infrastructure. The third party is also responsible for the operation and continued management of the infrastructure, until such time when it is transferred back to the city.

The BOC and MOD models, in comparison, assign varying levels of responsibility in the building, operation or maintenance of smart city projects for the public and private sectors that are involved in those works.”

Cities like Columbus, OH, home of , and the Columbus Partnership, are actively engaged in seeking out PPPs as part of their Smart City buildout. Other cities are following their lead. The exact definition of a PPP today is however, up for debate and highly individualized. There are many unclear issues around financial responsibility, ongoing operations, and ultimately ownership of the asset or service in question.
To help cities navigate the complex world of complex funding challenge of public-private partnerships, the Smart Cities Council has published a detailed Smart Cities Financing Guide, with “Expert analysis of 28 municipal finance tools for city leaders investing in the future”.

Finding and negotiating creative financing approaches will be critical to widespread adoption of smart city practices. Private companies will play a significant financial role in making that happen.

Paying for Smart Cities

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