Creating The Smart Cities Of The Future - PwC

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Creating the smartcities of the futureA three-tierdevelopment model fordigital transformationof citizen services

Executive summaryMapping out the future for smart citiesThe development of smart cities –enabled, powered and integrated by digitaltechnologies – is set to be one of the crowningachievements of societies worldwide in the 21stcentury. Already, the everyday lives of peopleliving in countless cities are being made easier,more fulfilling and more secure by previouslyundreamt-of services enabled by digital. Yet thetransformation of our cities has barely begun. Andlooking forward, as citizens’ expectations grow,urban populations continue to expand, energyefficiency and sustainability rise in importanceand government systems are upgraded over time,the pace of progress and innovation isn’t likelyto let up.Yet the evolution of smart cities needs more thantechnology. Continued progress depends criticallyon the right relationship between the two primarygroups of players most directly involved inbuilding solutions to meet the rising needs andexpectations of citizens: namely governmentauthorities, and the private-sector partners whohelp turn their vision of connected, efficient, 24x7citizen services into reality. PwC’s extensiveexperience with smart city projects worldwide –including our work with the World EconomicForum on urban development1 – has enabled usto identify a fundamental progression that’sunderway in how the public and private sectorswork together to deliver the best outcomes forcitizens. It’s a continuum that consists of threetiers, and it’s happening today. In this paper weexplain what it is, how it works, and whyit matters.1PwC/World Economic Forum, Circular Economy in Cities: Evolving themodel for a sustainable urban future, 2018Creating the smart cities of the futurePwCMay 20192

A three-tier development modelThe development of smart cities around the worldis gathering pace, with the total value of the globalsmart city market projected to exceed US 1 trillionby 2020 and US 2.5 trillion by 2025 (see Figure 1).As this growth continues, one of the most importantand dynamic aspects of smart cities is the evolutionof the roles and relationships between the keyparticipants involved in envisioning and creatingthem. These are primarily government bodiesaiming to transform the lives, wellbeing and safetyof their citizens; and an ever-widening array ofprivate sector players helping to realize theseaspirations, by building, managing and fundingdigital urban infrastructure and services. Whileother stakeholders are also involved – includingnot-for-profit organizations and citizens themselves– it’s government and the private sector that arelargely building the digital infrastructure of the city.Figure 1Global smart city market (US bn), 2018-2025 3,000 2,500 2,00016.3%17.5%18.5%19.5%20.6%21.7%25.0%23.0% 2,57720.0% 2,094 1,72115.0% 1,428 1,500 1,194 1,000 737 85810.0% 1,0075.0% 500 00.0%20182019Revenue202020212022202320242025Growth rateSource: "Smart Cities Market Analysis & Segment Forecasts to 2025", Grand View Research, 2018Creating the smart cities of the futurePwCMay 20193

A three-tier development modelIn PwC’s view, the relationship between these two principal stakeholders is evolving along a three-tiercontinuum – a journey that’s reshaping how smart city digital infrastructure will be developed, financed anddelivered worldwide in the years and decades to come. The emergence of this continuum is a global trend,but one that’s progressing at a varying pace in different markets, and even in different services within thesame city. But while the three tiers can all co-exist at the same time, each has distinct characteristicsand impacts.Tier oneThis tier is based on what might be regarded as fairly traditional contracting structures between publicsector entities and the private sector, generally with the goal of delivering a “point implementation” ofa specific smart city service, capability or infrastructure. Examples might include the creation of atraffic or parking management system, public Wi-Fi, LED streetlighting, a mobile app for citizens toreport potholes, or a system for managing and monitoring water usage.The dynamics of this tier reflect the fact that, in the initial stages of the move to smart cities, publicsector entities engaged the private sector to implement specific technologies or services to meet anexpressed need from city planners. Over time, the private sector players they engaged have alsobeen able to suggest and recommend a wide range of other technologies and solutions that couldalso help the public sector realize a smart city vision or functionality.Partly as a result, the initial contracting relationship is evolving towards collaboration and jointdevelopment of solutions between the public and private sectors, albeit sometimes with conflicting orcompeting private sector interests, data standards and inter-operability constraints. The primarycharacteristic of this tier, however, is that the economic arrangements have remained primarilythose of a public sector entity contracting with a private sector entity to provide a service, solutionor technology.Tier twoBuilding on the first tier, this second form of relationship facilitates the development and deploymentof additional services on the base digital city infrastructure. These services are then offered to – andused by – citizens in other areas of their lives, multiplying the benefits. Examples might include atransit payment card system that is enhanced into a smartphone and/or facial recognition-enabledpayments mechanism, and then expanded beyond its core remit in the transit network to act as abroader, even city-wide payment platform infrastructure.In tier two of the smart city development continuum, the private sector partner has a significantlylarger customer base, and the city often receives a share of the revenues generated from thesecustomers’ use of the additional services being offered. When properly structured, tier tworelationships offer cities the opportunity not only to improve services to citizens, but also tomonetize expanded digital services.While these “public-private partnership” (PPP) type arrangements can be highly attractive both tocities and the private sector, they require a high degree of sophistication in the contracting methodsused. If not structured properly, the agreements in this tier can carry risks of creating rigid, evenmonopoly-like structures, or short-changing the public or private sector on potential servicesand revenues.Creating the smart cities of the futurePwCMay 20194

A three-tier development modelTier threeThe third tier – which is just beginning to take shape – involves some of the most exciting newdevelopments in smart city projects. The defining characteristic of this tier is the development of adigital ecosystem in and around the city’s digital infrastructure, with the result that new products,services, businesses and government revenue opportunities are created on the smart city platform.Crucially, not all functions or operations of a city need be “smart” before this type of ecosystem candevelop. One ready example is streetlighting: in a number of jurisdictions where private sectorcompanies have been contracted to provide lower-cost streetlighting, they’ve implemented “smart”streetlighting that includes sensors, Wi-Fi, digital displays and other services. The deployment ofthese technologies has created a digital platform upon which innovative new services and solutionscan then be developed and deployed.The opportunities for such solutions are almost boundless. Beyond the obvious but attractive potentialto provide services such as Wi-Fi, 5G, advertising, and traffic and pollution monitoring, the ability – forexample – to aggregate and analyze traffic and pedestrian congestion information can be highlyuseful for retailers, autonomous car manufacturers and other players. Properly managed, such acapability can be monetized directly and/or provide the basis for further innovation around newservices. These essentially private-to-private deals signal a major acceleration of the smart cityinnovation ecosystem, and properly structured will offer citizens new services and governmentsadditional revenue opportunities.The evolutionary path between these three tiers is illustrated in Figure 2. A key point is that different areasof the city’s infrastructure and services can be at different stages at the same time, as they continue tomove along the continuum: healthcare can be run on a different basis from mass transit, for example. Butonce the continuum is established, it can trigger a virtuous cycle of digital development, with the success oftier three projects giving the city authorities the confidence to launch new projects based on tier one or tiertwo approaches, and then progress them through the continuum.Figure 2The evolutionary pathof smart city developmentTier threeFocuses on the developmentof a digital ecosystem in andaround the city’s digitalinfrastructure, creating newproducts/services, businessesand government revenueopportunities.Tier oneRelies on traditional contractingstructures between public entitiesand private sector providers,delivering services andinfrastructure; e.g. ,parkingmanagement system, public Wi-Fi.Creating the smart cities of the futurePwCTier twoFacilitates the development anddeployment of additional serviceson the base digital cityinfrastructure; e.g., mobile transitpayment card systems.May 20195

A three-tier development modelFrom a commercial perspective, city authorities may also choose to apply different tiers for differentprojects. For example, they might use a tier-one “transactional” model for small, quick wins such as mobileapps, while progressing to tier-two PPP structures for larger point projects with clear business cases, suchas LED streetlighting. The tier-three domain of platforms and ecosystems is still nascent due to the moredistributed and less foreseeable benefits these produce, but we’re already seeing some cities use smartcity point projects to subsidize the development of platforms. Going forward, a key determinant of thebenefits that the public and private sectors respectively derive from smart city platforms will be ownershipof data. Given this, cities must strike a fine balance between keeping control of their hugely valuable dataassets, and offering the private sector sufficient incentive to invest and collaborate in smart city initiatives.Overarching drivers, technologyinitiatives and challengesThese are the three tiers through which thedynamics of smart city projects are evolving. Andcutting across all of them are a number ofoverarching factors that are driving and shapingthe development of smart cities worldwide. AsFigure 3 shows, six critical technological andfinancial developments are acting as thefundamental enablers of smart city growth. Thefirst of these – the use of PPPs to overcome highfinancing costs – opens the way for cities toexploit the opportunities presented by emergingtechnologies, with current focus areas nowincluding 5G, blockchain and electric vehicles(EVs). Further drivers include a growing focus oncybersecurity, cloud and big data analytics – allareas where, once again, private sector expertisecan be invaluable.Creating the smart cities of the futurePwCMay 20196

A three-tier development modelFigure 3Six critical technological and financial developments driving globalsmart city growthPublic privatepartnerships Involvement ofcorporations toovercome highfinancing costsDevelopment inemergingtechnologies Blockchain Electronic vehicleinfrastructure IoTIncreasedfocus oncybersecurityCloud, edgeand fogcomputingOpen dataand big dataanalytics Protection ofcritical cityinformation andprivate citizen datamust be a jointfocus ofmunicipalities andbusinesses The volume,variety andvelocity of data isdriving the need tocapture, store andanalyze real-timedata Release andanalysis of freelyaccessible datapublished on opendata portals (e.g.,infrastructure,crime statistics)Expanding ICTinfrastructure 4G evolution 5G roll out Low power WANtechnologies Connectedcity-wide Wi-FiSources: PwC analysis, Technavio, Cisco, ITU, IEEE, Smart Cities Dive, GreenBizIn cities where these enablers are in place and functioning properly, the result has been the generation of adiverse set of near-term technology initiatives that can be broadly grouped into the categories shown inFigure 4. Alongside developments around the green agenda and the creation of smart intersections asentry-points to digital solutions, growing areas of focus include improving community engagement throughopen and multi-directional data flows, and using AI and accumulated data to make services morepersonalized and responsive to citizens’ needs.Creating the smart cities of the futurePwCMay 20197

A three-tier development modelFigure 4Technology outlook: near-term smart city initiativesSmart intersections as a cost-effective entrypoint to solutionsAI supported automation and optimization incity systemsNear-termtechnology trendsExpanding the smart grid for energy efficiencyIncreasing awareness of security and privacyGreen city initiativesIncreased use of accumulated dataOpen data to enable community engagementGrowth in connected vehicle capabilitiesGrowing number of smart commercial buildingsMulti-directional information flow(e.g., city-to-citizen, citizen-to-citizen, citizen-to-city)Sources: PwC analysis, Technavio, Cisco, ITU, IEEE, Smart Cities Dive, GreenBizCreating the smart cities of the futurePwCMay 20198

A three-tier development modelWhatever the technology initiatives being undertaken, smart cities are pioneering developments leadingour urban environments into new and uncharted territory – meaning they inevitably face a number ofchallenges. The most prominent of these hurdles are set out in Figure 5. While these challenges can beseen to some degree in all markets globally, their nature and relative importance vary in different territories,reflecting a vast range of factors – technological, infrastructural, political, social, economic and more. Assmart cities progress and develop, our three-tier model provides an ideal framework for addressing thesechallenges while simultaneously opening up new commercial and service opportunities.Figure 5Challenges in smart city implementationChallengesData Data overload; noisy,heterogeneous data(volume, variety andvelocity of data) Interoperability issues Management ofopen dataSecurity Complex and massiveattacks (cyber terrorism)due to interrelatedcritical areas Large-scale ramificationsof an attack Shared responsibilityfor securing the cityPolicy Lack of IoT standards Legislation and policies Embedded or rigid publicsector processes Slow governmentprocedures andreaction timesVendors Public-privatecollaboration Coordination amongmultiple stakeholdersCitizens Lack of confidence inusing and benefiting fromsmart city services Citizen participation andprivacy concerns Inclusivity andsocioeconomicconsequencesTech City-wide networkcoverage Network capacity Retrofitting existinginfrastructureTalent Lack of trainingworkforce Shortage of fundsfor training Aging workforceResource Funding, ROI Business models Meet growingenergy demandsSource: PwC analysis, Technavio, Cisco, ITU, IEEE, Smart Cities Dive, GreenBizCreating the smart cities of the futurePwCMay 20199

Physical/digital integration in publicinfrastructureAs the three-tier continuum becomes more established, it’s supporting a related trend that’s emergingin city infrastructure developments of many types: the tendency for developers to integrate "smart" cityelements into large-scale public infrastructure programs. In parallel, we’re also seeing the same trendin residential and commercial development, supporting the availability of an ever broader range ofInternet of Things (IoT) services to create unique, user-centric experiences in the home, in the office oron the street, while also improving efficiency and sustainability of these communities.There are many instances of this blending of physical and digital: in the US alone, current examplesinclude the integration of "smart city” elements into large-scale developments including sports stadia,art spaces, seaports and leisure developments. In each case, the developers have identified andpositioned "smart" as a defining element of the experience for the consumers, residents or businessesusing the asset.To date, physical/digital convergence in public infrastructure has tended to take place mainly in parallelwith what cities themselves are trying to do, rather than as part of public-private projects. However, thisis starting to change, as the public sector becomes more involved in these forward-looking programs.It’s also worth noting that private sector developers can fulfill a useful function as accelerators andlaboratories for new types of smart environments. In playing this role, they’re helped by the fact thatthey’re often building on greenfield sites, and can sometimes move faster than public sectorentities. The experience that the private sector gains on these projects can be fed into future publicprivate programs.Creating the smart cities of the futurePwCMay 201910

“Smart” maturity is growing amongcities worldwideLooking across the globe, cities vary widely in their readiness and ability to seize the opportunitiespresented by smart city innovations and investments. Driven partly by a push via public funding, andpartly by an increasingly urgent need springing from headlong urbanization, cities in Asia have beenamong the leaders, taking a proactive and progressive approach to developing smart infrastructure andservices. Meanwhile, Europe is pushing through with many smart city investments, often includingenvironmentally friendly elements such as green energy, again with involvement from public funding.Smart city developments in the US are – in some cases – more private-sector driven.That said, there are many exceptions: in every territory and continent, there are cities with outstandingand highly committed chief information officers (CIOs) and chief technology officers (CTOs) leading theway with the full backing of their mayors, driving the development of the digital environment top-down.In terms of services for citizens, these cities are pulling away from the less digitally mature and moredisjointed city administrations that are taking piecemeal, reactive steps, and which may face a struggleto catch up in the years to come.Ranged around both categories of city are myriad private sector developers and technology providerseager to collaborate with city authorities and tap into the opportunities that smart city services present.What’s clear is that these opportunities are growing for all stakeholders – cities themselves,developers, and the citizens who ultimately use the resulting services. To measure and benchmark cityplanners’ ability to organize, plan and integrate digitally enabled services, many smart city maturitymodels have been created in recent years. What’s different about our “three-tier” approach is that itlooks more holistically at how the underlying market is developing, rather than simply focusing onspecific service areas. Whatever a city’s current position on today’s maturity curve, we believe that ourthree-tier continuum can help it to map out the optimal route ahead.Creating the smart cities of the futurePwCMay 201911

The way forward for government andprivate sectorSo, given the evolving landscape we’ve described, what should city authorities and private sectortechnology providers, financiers and developers be doing today to reap the biggest benefits from thethree-tier continuum of smart city development?As innovation will continue to generate new services and solutions, it follows that government andbusinesses will need to be agile and adaptable in their relat

developments in smart city projects. The defining characteristic of this tier is the development of a digital ecosystem in and around the city’s digital infrastructure, with the result that new products, services, businesses and government revenue opportunities are created on the smart city platform .

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