Funding And Financing For Smart Cities - Deloitte
Funding and financingsmart citiesDeloitte Center forGovernment Insights
Funding and financing smart citiesAbout the authorsSteve HamiltonSteve Hamilton, MAis a senior managerat Deloitte & ToucheLLP in the EmergingMarkets practice basedin Washington, DC. Hehas more than 10 yearsof experience providing market, economic,strategic planning, and transactions supportfor large-scale infrastructure projectsworldwide including cities, special economiczones, ports, and airports.Ximon ZhuXimon Zhu is a seniorconsultant at Deloitte& Touche LLP in theEmerging Marketspractice in Washington,DC. He has more thanseven years of experienceproviding strategy consulting, capitalplanning, infrastructure finance, projectmanagement, and transaction supportservices worldwide.About the Deloitte Center forGovernment InsightsThe Deloitte Center forGovernment Insights sharesinspiring stories of governmentinnovation, looking at what’sbehind the adoption of newtechnologies and managementpractices. We producecutting-edge research that guidespublic officials without buryingthem in jargon and minutiae,crystalizing essential insights inan easy-to-absorb format.Through research, forums, andimmersive workshops, our goal isto provide public officials, policyprofessionals, and members ofthe media with fresh insights thatadvance an understanding ofwhat is possible in governmenttransformation.2
Funding and financing smart citiesGovernment leaders, citizens, and businessprofessionals across the United Statesunderstand that our infrastructure needsmajor reinvestment and modernization. Asis most visibly apparent in our cities, theseneeds typically surpass the municipal capacityto fund them. This forces city governmentsto carefully consider the cost benefit ofpursuing a particular project or suite ofprojects, as well as new models for fundingand financing infrastructure programs.Government financial officers can playa key role in enabling city reinvestmentand modernization using fiscal policy,public-private partnerships (PPPs), andperformance-based revenue models asimportant levers to catalyze economicallyimpactful capital investments that createlong-term value for citizens, businesses, andthe city as a whole. Not only is the safetyand security of our citizens and businesses atrisk as infrastructure assets age and fall intodisrepair, but so too is the broader economicwell-being and global competitiveness of ourcities and our country.Undertaking a broad-based smart cityreinvestment and modernization programwill help reduce costs, maximize revenuepotential, and improve citizen well-beingthrough the deployment of cutting-edge,technology-enabled infrastructure that ismore environmentally friendly and resilient.3
Funding and financing smart citiesurban living—is projected to reach 1.2trillion by 2019.3 These domains includeindustry automation, smart grid, security,education, home and building, healthcare,transport, and water and waste.For federal, state, and local leaders—including those in financial and accountingroles—looking to transform our cities, thereare two important questions:1. What combination of existing andnew approaches exist to fund/financesmart cities?2. What does the new partnershipmodel look like as you embarkupon a smart cities program—howcan different levels of government,industry, and other non-governmentalentities work together to create smartcities—and will old procurementmodels need to be updated tonew realities?According to Technavio, the smart citiesmarket—interrelated domains that impactFigure 1E n g a ge m e n tMobility&com m uni c ati onssecuritI n f o r maSecurityCybernolog yEconomiccompetitivenessSustainabilityQuality of lifeCo l l a b o r a t i o nchti otenyomoncEEnvironmentThe country’s deferred maintenancechallenges coexist with disruptivetechnologies that are reconfiguring howwe live, work, and interact with our cities:automated/autonomous vehicles; ridesharing services; cloud-based managementservices for improving municipal servicesdelivery; Internet of Things (IoT); androad, water, and lighting systems withembedded sensors. These technologiesforce city managers, planners, and financialand accounting managers to consideror rethink issues such as citizen datacapture/management, revenue models,cybersecurity, urban density, transportationnetworks, and land-use allocation. “Smartcities” consist of investments in human andsocial capital, traditional infrastructure, anddisruptive technologies that fuel sustainableeconomic growth and a high quality oflife with the wise management of naturalresources through participatory governance.In clu s i o nAccording to the American Society of CivilEngineers’ 2013 Report Card for America’sInfrastructure, our near-failing grade (D )will require an estimated investment of 3.6 trillion by 2020.1 In September 2016,former US Treasury Secretary LawrenceSummers wrote: “The case for infrastructureinvestment has been strong for a long time,but it gets stronger with each passing yearas government borrowing costs declineand ongoing neglect raises the returnon incremental spending increases.”2Summers is a leading voice on the needfor major infrastructure reinvestment andmodernization in the US, which can not onlyimprove the quality and condition of ourinfrastructure, but also produce positiveeconomic returns for ngOBJECTIVESTransparenc y4
Funding and financing smart citiesWhat is asmart city?How are thefederal, state, localgovernment, andprivate sectorcurrently involvedin smart cities?The convergence of technology and infrastructure provides a workable constructfor smart cities that forms the basis of this discussion. This construct placesthe smart city at the center of traditional infrastructure. Its connection to andaugmentation by IoT technology allows for process optimization and automationto occur, thereby making it “smarter.” Smart infrastructure can be segmentedinto six domains, governed by a nuanced framework, in which the city and itscitizens are simultaneously users and enablers of the system, incorporatingshared objectives. Figure 1 illustrates this schematic.Smart city stakeholders are evolving with different levels of focus andinvolvement at the federal, state, and local levels. The market is diverse andcomplex given the cross-cutting needs of cities. The private sector, foundations,and non-governmental organizations are involved as service providers,financiers, and industry collaborators, and are also defining standards.Figure 2 provides examples of stakeholders, roles, and programs.5
Funding and financing smart citiesFigure 2ActorFederalStateLocalPrivate sector/otherCurrent status/involvement President [Obama]’s Councilof Advisors on Science andTechnology released a report(February 2016) encouragingthe adoption of smart citiesand suggesting tens ofmillions in funding4 States can channel debtand grant funding for urbaninfrastructure projects thathave significant regionalimpact using financingfacilities such as staterevolving funds Cities such as Pittsburghand Atlanta have appointedchief information officersresponsible for leadingmunicipal-level strategies forsmart technology Management consulting firms Policy environment is evolvingunder President TrumpPotential role Encourage the enablingenvironment through federallegislation—grants andfunding provisions for smartcities Support development ofan infrastructure bank withspecific investment andlending programs for smartcities technology adoptionProgram examples(real and potential) US Department ofTransportation Smart CityChallenge US Department of Housingand Urban Development —Community DevelopmentBlock Grant Program, Section108 Loan Guarantee Program Architecture/engineeringfirms Technology firms Financial institutions Smart Cities Council National Institute of Standardsand Testing Expand project eligibility Support infrastructure bonds Collaborate with federal,criteria to receive fundingthat include a focus on smartstate, and local governmentfrom financing facilitiescity technology adoptioncounterparts to providespecifically for inclusion ofindustry insights and leadingsmart cities projects that may Coordinate efforts betweenpractices during the planningprivate sector and federal/have cross-cutting featuresand design phasesstateofficestodrivespanning traditional sectorsimplementation of smart city Implement and deliver smartsuch as energy, transport,strategyinfrastructure in support ofand watergovernment mandates Property Assessed CleanEnergy Financing in Marylandprovides low-cost financingfor eligible clean tech andenergy efficiency projects,which are key components ofsmart city infrastructure Atlanta smart city initiativesdriven by a citizen-approvedinfrastructure bond of 250million AECOM Brilliant Cities IBM Smarter Cities AT&T Smart Cities Siemens IntelligentInfrastructure Solutions Black & Veatch SmartIntegrated Infrastructure Atkins Future Proofing Cities6
Funding and financing smart citiesExistingand newapproachesto fund andfinancesmart citiesCities can adopt a variety of approachesto fund/finance smart city projects. Itis important to distinguish betweenthese two terms, which are often usedinterchangeably. Financing refers to thetime-shifting of costs through which aborrower (for example, a city) can defercosts incurred for capital projects untila future point in time (such as the loanmaturity date). Funding refers to the meansby which project costs are repaid by thecity through mechanisms such as propertytaxes. Financing and funding are used topay for and generate revenue to servicecosts related to traditional infrastructuredevelopment (see figure 3).Addressing the challenge of investing insmart cities programs requires creativethinking that departs from traditionalmodels of infrastructure finance. Undertraditional models, infrastructure projectsare paid using debt instruments (financing)whereby the city secures capital fromfinancing sources (such as commercial ordevelopment banks) in the form of municipalbonds. The capital is used to pay for thecost of construction, and there is usually agrace period during which the borrower isexempt from repayment until constructionis completed. Once the infrastructure assetis operational and earning a revenue stream(funding), the proceeds are used to repaythe principal and interest on the bond. Thisprocess assumes the project is of a certainscale (for example, 100 million or more),that it falls within core sectors—such aswater, transport, energy, and informationand communications technology (ICT)—and that proceeds from its asset revenuestream can be solely dedicated to servicethe debt (more applicable to project bondsthan general obligation bonds). This model isparticularly relevant for a growing segmentof the 3.7 trillion US municipal bondmarket: green bonds. Similar to traditionalmunicipal bonds, these notes generateproceeds used to finance infrastructureprojects in climate-aligned sectors suchas water or transport. Green bonds havegrown in popularity in recent years, withnotable examples including Washington, DC( 350 million) and Seattle ( 923 million).5Smart cities, on the other hand, are morethan traditional physical infrastructure.While some may argue that smarttechnology falls under ICT because ofthe inclusion of fiber-optic networks, itfunctions laterally across sectors becauseits core attribute is inter-connectivitybetween infrastructure systems. Smartcity infrastructure, therefore, can comprisemultiple sectors and be adapted foruse beyond the realm of traditionalinfrastructure functions. This inherentflexibility presents both opportunitiesand challenges for cities from a funding/financing perspective. This can bedemonstrated by analyzing one example ofsmart city technology—smart street lighting.Figure 3Financing sourcesFunding sourcesCommercial banksProperty taxesDevelopment banks/multilateralsBusiness taxesMunicipal or project bondsMunicipal income taxGreen bondsTolls and user chargesTax increment financing (TIFs)Pay-for-performance modelsLeasing and vendor financeAsset disposalsCredit guaranteesFederal grants7
Funding and financing smart citiesAs detailed in figure 4, smart street lighting(also referred to as sensory light networks)are LED street lights equipped withenvironmental sensors used for monitoringair pollution, temperature, and parkingspaces. Each sensor-enhanced lighting poleis connected to a fiber-optics network, withthe aggregate system essentially servingas the central nervous system of the smartcity. Not only does the system provide thecity with energy-efficient street lights, it alsogenerates rich data on environmental andsocial performance. The city can monetizethe data by charging access fees for anythird-party developers who wish to developapplications using this data (such as aparking space app). Whereas traditionalstreet lighting project revenue streamsare realized through energy cost savingsalone, the revenue stream of smart streetlighting projects is increased by a multiplierfactor because of the economic value ofthe data. Any use of public data must bebalanced with careful consideration as tothe nature of the protection of user privacyand the potential cybersecurity risks of theunderlying infrastructure.As a further example, New York City recentlybegan deployment of LinkNYC6—a 200million project designed to replace legacyphone booths with 7,500 digital kiosksthroughout the city. Each kiosk will providecitizens with free high-speed Wi-Fi, alongwith other features that include wayfindingservices for tourists and sensors to monitorenvironmental data. The city has formed aninnovative partnership model to finance andfund the project with the sponsor CityBridge,a consortium comprising Qualcomm,Civiq, and Intersection. Under this model,the city provides concessions to allow theconsortium to install the kiosks (at no cost totaxpayers) and collect advertising revenue,which is shared with the city at an agreedupon rate. The revenue would be used tocover the costs of installation, equipmentmaintenance, and digital advertisingFigure 4. Smart street lighting applicationsCapabilitiesSensorsDimmable LED lightsCCTV camerasIntelligent signsE-V charging stationsMoistureTemperatureAmbient lightAir qualitySeismic activityRadiationoperations. The program is expected togenerate 500 million in advertising revenueduring its 12- year implementation period.Such funding models repurpose existingphysical assets, bring in private-sectorcapital and expertise, and ultimately createnew sources of revenue through datacollection and citizen engagement.Any use ofpublic data mustbe balancedwith carefulconsideration asto the nature ofthe protectionof user privacyand potentialcybersecurity risksof the underlyinginfrastructure.WindThree layers of apps for turning smart street lighting into a profit centerApps for lighting control and energy managementSSL vendor develops app for city/utility entity; cost isincluded with smart lightingBenefit: Adjusts light using motion-baseddimming, saving energy costsApps for security, partking, event coordinationApps developed by third-party vendors using Sensity’sAPIs and tools; small fee chargedBenefit: Gunshot detection using audiosensors can help accelerate responsetime to violent crimeApps for planetary data on earthquake detection,global warming, etc.Sensity charges vendors fees to access data anddevelop on their own platformsBenefit: Provides insights on weather—for example, solar energy producers arenotified ahead of cloud cover events8
Funding and financing smart citiesNewpartnershipmodels forsmart citiesRegardless of the technology application,a cross-cutting theme in smart cityinfrastructure investment is the reallocationof risk and reward between the publicand private sectors. Federal, state, andlocal leaders will increasingly encounternew partnership models for front-endinvestment and revenue sharing, includingpay-for-performance related to serviceimprovements or access to services. Evenresource-constrained federal, state, andlocal entities can participate in the emergingsmart cities market with the oversight oftheir financial, accounting, and infrastructureleaders. As in the case of the Smart CitiesChallenge sponsored by the US Departmentof Transportation (DoT), winning cityColumbus, Ohio received a 40 million DoTgrant, along with 10 million in support fromVulcan Philanthropies. The private sectoralso stepped forward with 100 million ininvestment. Collectively, this investment willbe used to transform how transportation isused in Columbus. One area of focus is ridesharing that can better connect lower-incomecommunities to their city, which can resultin economic benefits, citizen inclusion, andpotentially better health outcomes.The Columbus example shows that theprivate sector is willing to invest in pilotprojects as an up-front investment orloss leader, but will expect to participatein longer-term upside and downstreamimplementation opportunities. In thisincremental, modular development approach(in which smart city solutions are scaled toneeds over time and pilottested involvingmultiple partners), some of the key issuesinclude: the nature of existing procurementrules and the legal or regulatory frameworkadjustments that are required to assureany conflicts of interest are managed in amanner appropriate to the new model of riskallocation; the flexibility, interoperability, andlongevity of new smart city systems, (bothin terms of technology platform and acrossdepartments and agencies); and a movementto managed, cloud-based services and theassociated privacy and cybersecurity riskmanagement requirements.9
Funding and financing smart citiesThesmarterroad aheadGiven the need for large-scale reinvestmentand modernization of US cities, governmentfinancial leaders at the federal, state, andlocal levels are uniquely positioned toembrace and accelerate the adoption ofsmart cities. Realizing this vision requiresembarking on a smarter road.As a first step, this includes supportingpolicies such as fiscal incentives (includingtax abatements), PPPs, and qualifiedinfrastructure bonds specifically focused onsmart city requirements. The public sectorshould encourage private-sector investmentin new smart city partnership models thatwill reduce the near-term cost of investmentin technology-enabled infrastructure (in anera of public resource constraints), whileensuring any risk and reward considerationsare appropriately balanced.As a second step, new performance-basedapproaches for revenue sharing shouldbe built into delivery models for smart citysystems, whereby the public procurer ofservices and the private-sector investorsshare in the value of efficiency gains inservice delivery, advertising-generatedincome, and revenue from value-addedanalytics services.A critical third step on the road to smartcities is active federal, state, and localcollaboration. This includes the potential tofund special-purpose vehicles and align onpotential innovation districts within majormetropolitan areas (even military bases).These approaches are being continuouslytested and refined as municipalities pursuesmart city strategies, leading to valuablelessons learned and best practices that willenable the success of future adopters. Byembarking upon this smarter road aheadand these first three steps, governmentfinancial leaders can help make America’scities smarter—and ultimately more secure,resilient, and globally competitive.Endnotes1.ASCE, /; accessed Feb. 2, 2017. ASCE ranks thecondition and needs of the following infrastructure categories: energy; schools; public parks and recreation;transit; roads; rail; ports; inland waterways; bridges; aviation; wastewater; solid waste; levees; hazardouswaste; drinking water and dams on an A to F scale (A: EXCEPTIONAL, B: GOOD, C: MEDIOCRE, D: POOR, F
Funding and financing smart cities 5 What is a smart city? The convergence of technology and infrastructure provides a workable construct for smart cities that forms the basis of this discussion. This construct places the smart city at the center of traditional infrastructure. Its connection to and
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