Two-thirds of the world’s population is expected to live in urban areas by 2050, according to United Nations estimates. The urban population of India and China are expected to surpass 1 billion as early as 2025.
This unprecedented pace of urbanisation presents a unique set of challenges in the areas of governance, and organisational and technological advancement, while it also provides immense opportunities for the automation and digitisation of many processes that are essential to functioning cities.
According to G20’s Global Infrastructure update, Asian countries have an investment gap of $5 trillion on the total infrastructure need of $51 trillion, during the period 2018-2040, thus representing a potential deficit of at least 10%. Bridging this gap through smart solutions is a great way to build a viable smart city business model.
Deployment of wireless smart sensors to monitor the integrity of bridges and identify leakages in water distribution pipelines helps the city authorities to prioritise their limited investments. Early this year, AT&T launched a service in the USA to monitor the condition of ageing infrastructure assets such as bridges, roadways and railways for cracks, tilts etc. This will help the authorities to make the repair or replace decisions with accurate real-time data. Telecom operators are especially better positioned to scale up their pilot projects and create a compelling business case, due to their national or even international presence. For such smart solutions to work, the city needs to have certain basic infrastructure in place, which may not be the case with many fast-developing Asian cities.
However, there are applications where cities in Asia, could efficiently incorporate smart solutions. Examples include the following: • A crowdsourced mobile app called Safetipin was initially launched in New Delhi and later expanded to other Asian cities like Manila.
The objective is to make the cities safer, by involving users to perform audits and rank various locations.
• Chiayi City in South-central Taiwan, which was listed as having the worst air-quality in Taiwan, transformed itself within four years, using technology and community engagement. The success was due to an integrated approach of a) setting up Air Box for particulate matter monitoring and display; b) developing a network of smart e-bikes to reduce traffic congestion; and c) creating awareness in schools and communities.
• Indonesia has kicked off several smart street lighting projects especially in Jakarta and other cities in Java. Smart street lighting is increasingly recognised as the first step toward the development of a smart city, with multiple benefits like energy savings, public safety etc. New business models such as Lighting-as-a-service are exploited in Jakarta, Surabaya, Bandung and Makassar. The business opportunity for smart street lighting in Indonesia is four times that of a developed economy like Germany.
Financing smart cities
There are a variety of ways city councils can consider financing their smart city endeavours. The most direct option would be to invest public funds and own source revenues or seek federal funding.
Another option would be to adopt asset recycling, whereby the government negotiates new leases for older infrastructure projects to generate seed funding for new projects. In 2018 Australia initiated an Asset Recycling Initiative (ARI), which helped add nearly AUD 7.8 billion to the government coffers. However, huge initial investment from the exchequer or issuing municipal bonds will be harder for developing nations; and such countries can also look to obtain multilateral loans from International Development Organisations (IDOs) like the World Bank which invest in sustainable development projects. Furthermore, they also tend to provide risk and credit guarantees to absolve private lenders of risk in case of local government defaulting on contracts/obligations, thereby increasing the propensity for private sector investment.
Another avenue of revenue generation would be direct and indirect value capture. Project teams can generate value for an infrastructure project by levelling a special tax on companies that directly profited from the smart city initiative or by charging impact fees on developers.
City councils can also offer development rights in other suburbs and zoning changes – from residential to industrial for instance – to developers to entice a broader range of firms to invest in such infrastructure projects. By doing so, they can indirectly capture value for their smart city projects by using them as an opportunity to kickstart more developments nationwide. This was best implemented by Sao Paulo, Brazil throughout the early 2000s which exchanged certificates of potential additional construction (CEPACs) for investment in infrastructure projects.
These are just some of the popular methods of financing any smart city initiative; however, most projects have an over-arching procurement system framework within which a blend of the many abovementioned value-generating methods are employed.
There are a variety of frameworks that city councils can pursue in order to realise their Smart Cities, all with differing extents of private sector involvement. The public sector can choose to deliver the project directly, but this is reliant on municipal expertise and acumen in relevant fields to pull off such a large-scale project. For instance, Singapore’s smart nation approach to serve an ageing population through projects like TeleHealth and HealthHub that centralise healthcare databases and boost access to digital healthcare was developed by the Ministry of Health.
Alternatively, project teams can consider joint ventures or vendor financing which are usually short-term contracts on specific phases of the product development in which the private sector has significant expertise. This would bring in vendors like CISCO which announced a city infrastructure financing acceleration programme with funding of $1 billion, aimed at helping the city governing authorities deploy innovative technology with minimal capital outlay.
The most common framework would be the setting up of public private partnerships (PPP). In a PPP model, the government establishes a long-term contract with the private sector for the provision of services. The PPP aims to increase the efficiency of an infrastructure project where the relationship provides the government not just funding, but also private sector know-how in managing the project. While this may involve the construction of an asset which is temporarily leased to the company, payment is contingent on the private sector’s performance and the availability of the works or services acquired back by the city council, after a short period. A few examples of such partnerships are:
• IBM Command Centre in Bandung, Indonesia’s 3rd largest city, operates a digital monitoring facility that collects street-level data in a variety of sectors (traffic monitoring and accidents, safety issues and emergency response, floods and natural disasters, and crime), with the intent of improving the city’s management and governance.
• In partnership with the City of San Diego, General Electric (GE) upgraded the city’s lighting with LED and deployed an intelligent platform with a likely cost of $30 million, financed by GE. City leaders have estimated that it will save the city about $2.5 million worth of electricity per year, reduce maintenance costs, and provide other benefits.
In a few select cases, smart cities are conceptualised, developed and operated solely by the private sector. All risks are borne and proceeds gathered by private companies and individuals. These also tend to be the projects which promise the most innovation due to the extraordinary leeway and opportunities presented to the technological sector. Belmont, Arizona is a planned 24,000-acre smart city which will feature high-speed public Wi-Fi, self-driving cars, and hightech manufacturing facilities which are being built from scratch by a partnership involving Bill Gates’ investment firm; and local real estate investors promise a capacity of up to 80,000 residential units.
Positioning on this range of frameworks
There are different frameworks along this range from solely public options at one extreme to completely private ones at the other, with differing levels of private sector participation in between.
The ideal method will vary based on the city’s financing ability, its acumen in designing and building functions, and on its risk tolerance for innovation.
The dichotomy presented to the public sector is whether it sees the value in foregoing direct delivery and the corresponding proceeds despite shouldering the risk in exchange for a more private acquisition framework where it enjoys greater innovation while simultaneously transferring the risk to the private sector. SEI
About the author
Ravi Krishnaswamy is senior vice president, energy and environment, Frost & Sullivan. He heads Frost & Sullivan’s Energy and Environment Practice in the Asia Pacific region and is based in Singapore. Ravi has spent more than twenty years in the energy and environment sector. He is also Frost & Sullivan’s in-house expert on clean technologies and utilities.