SMART CITIES FINANCING GUIDE - Arizona State University
SMART CITIES FINANCING GUIDEExpert analysis of 28 municipal finance tools for city leaders investing in the futureDeveloped by the Center for Urban Innovationat Arizona State University
ForewordCities everywhere are challenged by congestion, pollution, crime, aging infrastructure,falling budgets and many other issues. Theyneed new strategies and new technologiesto address those challenges.Smart technology is a key piece of thesolution.But smart city projects come with price tags.And many smart technologies are relatively new and haven’testablished the kind of track record financiers want to see,which makes securing capital investments even more challenging.Happily, there are numerous financing tools available to helpcities and regional governments pay for smart city projects.Foreword Smart Cities Financing GuideThis guide highlights 28 of the most promising — including alternatives to the traditional funding mechanisms municipalitieshave used for decades. It also includes: Detailed analyses of each option based on 10 characteristicsto help decision makers easily identify the best tools forspecific types of projects. Examples of how these tools are being used today.The Smart Cities Council is grateful to the Arizona State University Center for Urban Innovation for the financial expertise andinsights that made this Smart Cities Finance Guide possible.Please refer to page 76 to learn about the authors and theCenter.Jesse Berst,Chairman, Smart Cities Council1
Table of ContentsForeword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Table of Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Chapter 1: City Financial Challengesand Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . 4Chapter 2: 10 Characteristics ofFinance Options . . . . . . . . . . . . . . . . . . . . . . . . . . 8Chapter 3: Government-basedFinancing Options for Cities . . . . . . . . . . . . . . . 121. General obligation bonds . . . . . . . . . . . . . . . . . . . . . 132. Revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153. Industrial revenue bonds . . . . . . . . . . . . . . . . . . . . . 174. Green bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195. Qualified Energy Conservation Bonds . . . . . . . . . . . 216. Social impact bonds . . . . . . . . . . . . . . . . . . . . . . . . . 237. Public benefit funds . . . . . . . . . . . . . . . . . . . . . . . . . 258. Linked deposit programs . . . . . . . . . . . . . . . . . . . . . 27Table of Contents Funding Smart Technologies9. Energy efficiency loans . . . . . . . . . . . . . . . . . . . . . . . 291. Loan Loss Reserve Fund (LRF) . . . . . . . . . . . . . . . . 5710. Property-Assessed Clean Energy . . . . . . . . . . . . . 312. Debt service reserves . . . . . . . . . . . . . . . . . . . . . . . . 5911. Greenhouse emissions allowance auctions . . . . . 333. Loan guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6112. User fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354. On-bill financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63Chapter 4: Development Exactions . . . . . . . . . . 371. Developer dedication requirements . . . . . . . . . . . . . 392. Tap fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413. Linkage fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434. Impact fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Chapter 5: Bringing the Public andPrivate Sectors Together . . . . . . . . . . . . . . . . . . 471. Public-private partnerships . . . . . . . . . . . . . . . . . . . 482. Pay for performance . . . . . . . . . . . . . . . . . . . . . . . . . 503. Securitization and structured finance . . . . . . . . . . . 524. Catastrophe bonds . . . . . . . . . . . . . . . . . . . . . . . . . . 54Chapter 6: Tapping the Private Sector . . . . . . . 565. Pooled bond financing . . . . . . . . . . . . . . . . . . . . . . . 656. Pooled lease-purchasing . . . . . . . . . . . . . . . . . . . . . 677. Value capture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 698. Tax increment financing . . . . . . . . . . . . . . . . . . . . . . 719. Philanthropic opportunities . . . . . . . . . . . . . . . . . . . 7310. International non-governmentalorganizations (NGOs) . . . . . . . . . . . . . . . . . . . . . . . 7411. Thinking more broadly:combining financing options . . . . . . . . . . . . . . . . . 75Chapter 7: Conclusions andAdditional Resources . . . . . . . . . . . . . . . . . . . . . 76About the Authors . . . . . . . . . . . . . . . . . . . . . . . 77About the Smart Cities Council . . . . . . . . . . . . . 802
Table of TablesTable 1: 28 Municipal Finance Tools at a Glance . . . . . 6Table 2: Summary Characteristics forGeneral Obligation Bonds . . . . . . . . . . . . . . 14Table 3: Summary Characteristics forRevenue Bonds . . . . . . . . . . . . . . . . . . . . . . . 16Table 4: Summary Characteristics forIndustrial Revenue Bonds . . . . . . . . . . . . . . 18Table 5: Summary Characteristics forGreen Bonds . . . . . . . . . . . . . . . . . . . . . . . . . 20Table 6: Summary Characteristics forQualifying Energy Conservation Bonds . . . 22Table 7: Summary Characteristics forSocial Impact Bonds . . . . . . . . . . . . . . . . . . . 24Table 8: Summary Characteristics forPublic Benefit Funds . . . . . . . . . . . . . . . . . . 26Table 9: Summary Characteristics forLinked Deposit Programs . . . . . . . . . . . . . . . 28Table 10: Summary Characteristics forEnergy Efficiency Loans . . . . . . . . . . . . . . . . 30Table 11: Summary Characteristics forProperty-AssessedClean Energy Programs . . . . . . . . . . . . . . . . 32Table 12: Summary Characteristics forGreenhouse EmissionsAllowance Auctions . . . . . . . . . . . . . . . . . . . 34Table 13: Summary Characteristics forUser Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36Table 15: Summary Characteristics forLinkage Fees . . . . . . . . . . . . . . . . . . . . . . . . . 44Table 16: Summary Characteristics forImpact Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 46Table 17: Summary Characteristics forPublic-Private Partnerships . . . . . . . . . . . . . 49Table 18: Summary Characteristics forPay for Performance . . . . . . . . . . . . . . . . . . . 51Table 19: Summary Characteristics forSecuritization and Structured Finance . . . . 53Table 20: Summary Characteristics forCatastrophe Bonds . . . . . . . . . . . . . . . . . . . . 55Table 21: Summary Characteristics forLoan Loss Reserve Funds . . . . . . . . . . . . . . 58Table 22: Summary Characteristics forLoan Loss Reserve Funds . . . . . . . . . . . . . . 60Table 23: Summary Characteristics forLoan Guarantees . . . . . . . . . . . . . . . . . . . . . . 62Table 24: Summary Characteristics forOn-Bill Financing . . . . . . . . . . . . . . . . . . . . . . 64Table 25: Summary Characteristics forPooled Bond Financing . . . . . . . . . . . . . . . . 66Table 26: Summary Characteristics forPooled Lease Purchasing . . . . . . . . . . . . . . . 68Table 27: Summary Characteristics forValue Capture . . . . . . . . . . . . . . . . . . . . . . . . 70Table 28: Summary Characteristics forTax Increment Financing . . . . . . . . . . . . . . . 72Table 13: Summary Characteristics forDeveloper Dedication Requirements . . . . . . 40Table 14: Summary Characteristics forTap Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42Table of Contents Funding Smart Technologies3
Chapter 1: City Financial Challenges and OpportunitiesIn 2008, the world passed a milestone. That year,over half of the world’s population lived in urbanareas. There’s no foreseeable end to the trend thathas today’s cities expanding at an unprecedentedrate and new cities emerging. The world’s totalurban area is expected to triple between 2000 and2030 and urban populations could double in thatsame timeframe.ly resource-constrained – a reality that becomesincreasingly burdensome as burgeoning populations put increasing pressure on often inadequateand outdated infrastructure, from water and sewersystems to transportation networks. And these citieswill remain fragile and struggle under the demandsof a swelling population unless we find ways tomove the needle on making them more sustainable.Such rapid urbanization carries significant implications for the world’s ecosystems as outlined in a2012 United Nations report. Of critical concern isthe growth in the number of mega-cities emerging inAsia, South America and Africa. In 2011, the WorldBank listed 26 cities with an urban population over10 million inhabitants and nine of them exceeded20 million. These mega-cities – places like Tokyo,Mexico City, New York City, Mumbai, Karachi, andBeijing – are enormous. And they’re expandingbeyond traditional city boundaries into dynamicregional entities.One solution we’re seeing in pioneering cities aroundthe world is the use of advanced information andcommunications technologies (ICT) to make infrastructure smarter and more sustainable. By design,ICT-enabled cities – or smart cities – are moreresilient during times of distress due to effectiveresource allocation and infrastructure management.As critical economic hubs, cities contribute tonational stability and growth. Yet they are typical-No one said infrastructureupgrades would be easyStill, upgrading physical infrastructure with smarttechnologies is often a huge challenge for cities.One example is Mumbai, India’s most populous city,Chapter 1: City Financial Challenges and Opportunities Smart Cities Financing Guidewhere the physical infrastructure is already so fragilethat simply keeping it relevant and usable in the faceof an exploding population is an enormous undertaking. Finding the wherewithal to take it to the nextlevel – to implement innovative technologies thatare both sustainable and financially feasible – isn’teasy.Yet Mumbai is managing to do it. In 2012, smartmeters from Itron, a Smart Cities Council GlobalPartner, were placed on the system that supplies tapwater to Mumbai. The meters helped find leaks anddiscourage waste so more residents could get water. The system ultimately cut water losses by 50%.Making city infrastructure operate more efficientlywith advanced technologies, like the smart watermeters installed in Mumbai, has become an imperative for public officials, scholars and citizens seekingsolutions to the growing environmental ills andurban challenges that cities face. As advocates ofsmarter cities, they recognize the important role ICTplays in driving economic competitiveness, environmental sustainability and general livability:4
They see how: Smart meters can monitor and incentivize energyand water conservation Electronic road pricing, sensors and tolling canregulate traffic and lower congestion Public safety departments can use predictiveanalytics to target crime hotspotsIntegrating intelligent infrastructure with city-wideconnectivity and data analytics – three foundationsof a smart city – provides situational awarenessthat makes possible some amazing developments.For example, Singapore crunches data to predicttraffic jams while there is still time to minimize theireffects. Rio de Janeiro can predict just where flooding will occur from a particular storm, so emergencycrews and evacuation teams know just where to go.Promise of smart cities vs.the challenge of paying for themClearly, the emergence of innovative technologiesto help cities become smarter holds great promise.Yet a significant challenge remains: finding ways tofinance the much-needed infrastructure upgrades.Cities and other public entities hoping to upgradeinfrastructure with smart technologies must findinvestors and financial institutions willing to financesmart projects in an environment still cautious afterone of the most significant global economic crises ingenerations. Financing smart infrastructure projectsis expensive and requires creative approaches thatfocus on both short-term and long-term goals.Cities have been slower to emerge from the financialcrisis and many are desperate for ways to bring incash to offset depressed tax revenues and longerterm cuts in federal support. Unfortunately, suchdesperation combined with limited financing infor-Chicago’s toughlesson in financeAs we’ve said, many smart technologies arerelatively new. Models that compare variousfinancing tools to fund investments are not yetavailable. That forces instigators of smart projects to do the best they can with the knowledgeand resources available. And costly mistakescan happen. That was the case in Chicagowhere a string of public goods were privatizedso the city could receive immediate income. Aparticularly striking example was in 2008 whenChicago leased its parking meters to a privateconcessionaire for a 75-year period in returnfor about 1.2 billion in upfront cash; a sum thecity’s inspector general calculated was about 974 million less than the concession wasworth, according to a Bloomberg report. Themation has led to some poor decisions on the partof public officials.Wisely funding technology investments is critical tothe realization of smarter cities. Certainly some technology investments are a one-time event, but mostare operationalized in the context of projects. Theseprojects are often complex undertakings, involvinglongtime horizons, multiple stakeholders and risk.Matching the projectto the financial toolPart of the challenge for cities is in selecting theright tool at the right time. As you read through thisguide you can familiarize yourself with numerousfinancing options available for various types ofsmart city investments and see which ones areChapter 1: City Financial Challenges and Opportunities Smart Cities Financing GuideLack of due diligence in financial deals can be costly .manner in which the deal was done caused apublic uproar and the sudden and steep increase in parking fees triggered a lawsuit. In theend, the city had to pay a consortium of plaintiffs 8.9 million for procedural wrong-doing.most appropriate for specific types of projects. Forinstance, the European Commission expects energyconsumption to rise by 50% over the next 20 years.That increasing demand for energy and the needto reduce environmental pollution are issues citieseverywhere must address. Renewable energy is oneobvious solution — but renewable energy projectsare extremely capital intensive. The nature of capitalprojects is that there is a large front-end investmentwith the benefits captured over the life of the project.Consequently, these are often financed with somekind of long-term financing package. Renewableprojects, e.g., solar power also have other challenges; without some kind of subsidy, revenues can’tcover operating costs and a return of and on capital.A public-private partnership may be a viable optionwith this sort of project.5
The challenge with many of the newer smart citytechnologies is that would-be investors see them ashigh risk because the ROI is uncertain. On the otherhand, Many projects that have uncertain ROIs canbe financed through traditional sources, albeit withlower levels of debt financing. However, projectsthat embody some element of technology risk–first-of-a-kind projects, for instance – cannot attractdebt financing and generally require guarantees orother forms of credit support (or all equity financing).The financing options outlined in this guide generallyfall outside the realm of early developmental venturecapital. Rather, the tools highlighted in the pagesthat follow fall into four general approaches: Government-based financing toolsTable 1: 28 Municipal Finance Tools at a GlanceGovernment-basedFinance OptionsDevelopmentExactionsPublic and PrivateOptionsPrivate SectorLeveragingGeneral ePartnershipsLoan Loss ReserveFundsRevenue BondsTap FeesPay for PerformanceDebt Service ReservesIndustrial RevenueBondsLinkage FeesSecuritization andStructured FinanceLoan GuaranteesGreen BondsImpact FeesCatastrophe BondsOn-Bill FinancingQualified EnergyConservation BondsPooled BondFinancingSocial Impact BondsPooled LeasePurchasing FinancePublic Benefit FundsValue CaptureLinked DepositProgramsTax IncrementFinancing Development exactions Public-private partnerships Private fund leveraging optionsYou’ll see details about each tool, case studieswhere they are being used and a standard schemefor evaluating them as a potential tool for any givencapital project, including common pros and conswith each.But first, let’s quickly consider “The Project.”That’s a capital ideaFinancially viable capital projects play a starringrole in sustainable development. We’re referring, ofcourse, to projects cities undertake to construct,retrofit, restore or upgrade capital assets. Municipalbuildings, sewer lines or local roads are commonexamples. Capital projects are both important andEnergy EfficiencyLoansProperty-AssessedClean EnergyProgramsGreenhouseEmissions AllowanceAuctionsUser FeesChapter 1: City Financial Challenges and Opportunities Smart Cities Financing Guide6
to understand the expected feasibility, viability andprofitability. As we’ve mentioned, this can be a challenge for city leaders with capital intensive projectsthat leverage newer technologies. With limited information on how a new project might perform, riskassociated with the investment increases. And withincreased risk, the cost of capital will likely increasetoo. While this is true of any project requiring financing, the challenge is more acute with newer technologies that have yet to prove out or achieve scale.Historically in the U.S., the federal government shouldered the cost of major infrastructure like the interstate highway system.challenging because, as the name implies, theyrequire capital.Recovery and Reinvestment Act anytime soon. Thenumbers below tell the story:By their nature, these assets have a long expected lifecycle. So the goal in financing them is to spread thepayments over the life of the asset, which requires arevenue stream to cover the financing repayment aswell as a return to investors. From 2000-2010, the U.S. government averaged 300 billion per year in support to state and localgovernments solely for infrastructure maintenanceHistorically, public sector entities took on the financing of major physical infrastructure development.A familiar example is construction and repair of theU.S. interstate highway system, which is financed primarily by the federal government because the benefits accrue to the nation as a whole. Highways thatcrisscross the country facilitate travel for citizens, butalso the movement of goods to market. Most wouldagree that economic development and aggregatewealth in the nation has risen due in large part to theinterstate highway system.Given today’s political and budgetary climate, relyingon historical support from either federal or statesources is not as viable an option for U.S. cities asonce was the case. Nor does it seem likely we’ll seeanother stimulus program like the 2009 AmericanThat’s where creative financing models enter thepicture, as you’ll see in the pages that follow. Since 2010, that average has dropped to 150billion at the same time public works specialistsprojected the amount should have been increasedto 450 billion just to keep up with the current levelof disrepair.Many would argue this reduction in infrastructuresupport is the new reality in the U.S.Yet cities are increasingly rising to the challengein creative ways — exploring new opportunities towork together on shared infrastructures and investigating new funding tools and partnerships that relymore heavily on private
Smart technology is a key piece of the solution. But smart city projects come with price tags. And many smart technologies are relatively new and haven’t established the kind of track record financiers want to see, which makes securing capital investments even more chal-lenging. Happily, there are numerous financing tools available to help
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to technology suppliers to Smart Cities, Smart City program managers, academics researching innovation and Smart Cities, and disability organizations and advocates working to make innovation and Smart Cities more inclusive. This Playbook has been designed to complement other tools that make up the . Smart Cities for All . Toolkit.
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
smart grids for smart cities Strategic Options for Smart Grid Communication Networks To meet the goals of a smart city in supporting a sustainable high-quality lifestyle for citizens, a smart city needs a smart grid. To build smart cities of the future, Information and Communications Techn
Smart City Platform Platform Platform Service Application IoT World Bank Korea Week 2020 Smart Cities of Korea. 2 Trends. Gen 1 : Sustainability Development of Smart City 3 2017 Google, Sidewalk Master Plan 2014 Singapore, Smart Nation 2012 China, announced a plan to build 320 smart cities 2018 Korea, National Pilot Smart City 2011
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smart cities in Cape Town, South Africa and the privacy concerns associated with smart cities. C. HARACTERISTICS OF . S. MART . C. ITIES Cities around the world are attempting to transform into smart cities, in order to be more economi-cally competitive and promote sustainable gr
2019), the term "smart city" has not been officially defined (OECD, 2019; Johnson, et al., 2019). However, several key components of smart cities have already been well-established, such as smart living, smart governance, smart citizen (people), smart mobility, smart economy, and smart infrastructure (Mohanty, et al., 2016).
