Building Smart Cities Will Require Creative Funding Approaches

Cities struggling with finding funds for smart city initiatives might be wise to connect the issue with another that almost all municipalities have in common – aging infrastructure.

“There is an essential aspect in connecting the investments in smart technology to the imperatives of the aging infrastructure, and that, in turn, speaks to asset management,” said Rick Azer, Director of Development for Black & Veatch’s Smart Integrated Infrastructure business.

Azer noted that with the advancements in communications, sensor and connectivity technology, assets inevitably become “smarter” as they are replaced with new equipment. The ability to collect, measure, and move data from connected city elements demonstrates the increased value of these assets.

“In practice, this means that when utility or city managers talk of replacing gas and water mains, they should refer to more than just laying new pipe,” he said. “The installation of smart infrastructure needs to be part of that capital project, so that over time, there is the capability to detect methane emissions in the gas system or leaks in the water pipes.”

It becomes an issue of being more creative in funding and taking advantage of opportunities presented. For instance, while the streets are trenched, there’s opportunity for the cities to lay fiber optic conduits that, in turn, could generate revenue.

“The investments in state-of-the-art technology and the basic pipes and wires are interconnected like never before,” Azer said. “The marginal cost of implementing smart city platforms and applications can provide significant value to a municipality’s objectives in resiliency, safety and economic development.”

He pointed out that successful enhancements in economic prosperity can increase a city’s tax base, which could then bring additional funds needed for further development.

“These investments still require vision, advocacy, leadership and capital to begin,” Azer said. “As public or private entities, that is the challenge that must be addressed. In some cases, public-private partnerships may provide the best opportunity to move these initiatives forward.”

City Leaders Struggle to Find Funding

According to the Black & Veatch 2016 Strategic Directions: Smart City/Smart Utility report, survey respondents said by a large margin that they are struggling to find answers for funding smart city projects.

In fact, 50 to 60 percent of the survey respondents replied “don’t know” when asked vital smart city questions regarding:

• The ability of municipalities to fund smart city initiatives;
• The rate of return needed to justify investment;
• The opportunities to create revenue or savings from the data generated through the initiatives.

“Smart city is still a nascent concept, so there is much more education needed,” said Andrew Trump, who specializes in project financial evaluations for Black & Veatch’s management consulting business. “Currently, there is little consensus regarding strategies, funding mechanisms or overall programs, which leads to uncertainty about where to begin.”

Funding Individual Projects

While several cities have started the development of an integrated smart city architecture, today’s activity tends to be ad hoc – developing one application at a time as opposed to implementing wider, more coordinated long-term plans. Project funding is also very much application specific – such as upgrading conventional street lights with network-connected LEDs or establishing a municipal Wi-Fi service.

“An alternative approach might be to address integrated technology and system platforms through long-term master planning,” Trump suggested.

He noted that some municipally owned utilities appear poised to launch smart city applications more capably than others. This appears especially true for those developing and implementing smart grid. In fact, smart city initiatives can often emerge as an extension and enhancement of the smart grid, Trump said.

“Smart grid vendors get some of the credit for bringing some of the vision and incentive to these communities in this regard,” he added.

Focusing on a Solid Return on Investment

“We’ve witnessed that there are certain kinds of smart city developments that have a demonstrable ROI using conventional valuation techniques,” Azer said. “These are often the projects cities look to first when implementing smart city initiatives.”

Retrofitting street lights is one of the most visible examples, he said. If a city replaces sodium street lights with LEDs, electricity usage will likely drop by more than 60 percent, resulting in significant cost savings. Add in network connectivity that allows for adaptive control and another 10 percent in savings can be achieved.

The savings in the electricity bills can be used to offset the cost of the retrofit. He said the lighting district can justify the change to LED lamps as part of a capital-return issue without the prodding of a mandate.

“By applying the monetary savings in this example to other smart technology, this could become an ‘organic approach’ to funding other smart city applications,” Azer said.

Trump said that cities look to the results of pilot deployments to verify results. With tight budget constraints, projects need to be justified in terms of their own financial merit, but unfortunately, this minimizes the opportunity for integrated solutions – which is a core concept of smart city technology.

“Given the fiscal constraints in many communities, it can be difficult to trade near-term pain for long-term gain, especially when the investments entail a high degree of inter-department coordination and a certain level of political will,” Trump said. “Siloed organizations that can look beyond their own department budgets will be rewarded.”