With more than two thirds of the world’s population expected to live in urban areas by 2050, and the urban populations of India and China expected to surpass 1 billion as early as 2025, urbanisation presents a unique set of challenges in the areas of governance, organisational and technological advancement.
It also presents a number of opportunities for the automation and digitisation of many essential city processes and functions.
This worldwide rush to “smart cities” is also reflected by both state and federal efforts in the US, and by efforts in India to build 100 smart cities, demonstrating East Asia’s desire for technological hubs which solve the populace’s lifestyle needs, with digital solutions.
Smart cities have received much visibility in the last decade as a potential market with unlimited opportunities for companies in a wide range of sectors from technology to energy to mobility to health care. Also, developing a smart city has been touted as the be-all and end-all, for the challenges afflicting today’s urban agglomeration. While both of these could be true to a certain extent, the reality is that after a decade, the smart city movement is still in its infancy.
Due to cities being inherently budget conscious and constrained, many of the smart technology solutions have not moved beyond the pilot stage. Siloed city agencies and lack of multi-stakeholder buy-in have slowed down the smart city ambitions in many cases. Most cities also do not have a cohesive vision and strategy for their development. Despite all these factors, the biggest restraint and also the key success factor will still be the need for a compelling business model, unique to each city and sustainable in the long run.
Business models and value capture
The business models have to evolve in such a way that the urban technology companies are able to capture broader value beyond certain obvious revenue generation sources like advertising. The manifestation of this value for example in terms of higher rents for buildings, expansion of healthcare access to under privileged, lower cost of transportation, life extension of urban infrastructure, and improving public safety etc. will justify smart city investments.
The process for developing a smart city can be typically delineated into the following steps:
1. Identifying objectives and desired outcomes from initiatives
2. Inventorying current systems and assessing their relevance to the planned project
3. Defining the business model, i.e. how the project will generate economic value and how to monetise that value
4. Sourcing methods of financing the project Such projects require huge capital outlay as their very function is to incorporate the latest technological advancements in as many aspects of a resident’s life as possible; and such a comprehensive effort necessitates funding for the conceptualisation and development of these digital interfaces. This raises the question as to what exactly the revenue streams that comprise the business model of a smart city are and whether they are a sufficient incentive for financiers to step in with funding.
Smart cities primarily aim to reduce operational costs and help eliminate many inefficiencies or under-utilised services provided by city councils while also implementing a city-wide ecosystem that provides useful feedback. A few examples of such cost-saving initiatives are:
• Kansas City in the US has implemented smart lighting utilising LEDs across key city strips and plans to expand the project that has brought about a drop in energy consumption by 50-60% in addition to a reduction in maintenance costs. Furthermore, street lights come with inbuilt sensors that monitor and track other environmental and social data, access to which can be sold to third party developers for use in their own applications and generate further value for the city.
• Mandalay, Myanmar is already seeing the benefit of implementing technology on its streets which helps to reduce administrative costs in the operation of the city. Internet of Things (IoT) sensors are being used in the city to help officials keep track of water issues while drones are helping to map the city to plan drainage systems for the future.
• A region-wide effort in China spearheaded by counties like Gaoqing centralised systems around mobile applications thereby bypassing the need to set up analogue landline connections.
They also prioritised mobile banking and digital acceleration, creating savings on physical systems and brick-and mortar infrastructure that are otherwise needed for the operation of a city.
Asian countries have an investment gap of $5 trillion in the total infrastructure need of $51 trillion, during the period 2018-2040, according to G20’s Global Infrastructure update. This thus represents 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. 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.
There are applications that cities in Asia could efficiently utilise to 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.
• 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. And new business models seen as lighting-as-aservice are exploited in Jakarta, Surabaya, Bandung and Makassar.
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. The huge initial investment from issuing municipal bonds will be harder for developing nations; and may require risk and credit guarantees from multilateral agencies to absolve private lenders of risk in case of local government defaulting on contracts/obligations.
Direct and indirect value capture is another option. 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. 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 overarching procurement system framework within which a blend of the many abovementioned value-generating methods are employed.
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. 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 inhouse expert on clean technologies and utilities.