5 Things to Remember When Building a Smart City Business Case

By Christopher Reberger

Christopher Reberger is an independent adviser concentrating on the economics of smart cities and digital economies.

May 9, 2019 | Economy, Governance | 2 comments

Improvements in communications, mobility, and data management have provided public sector managers with a new range of investment opportunities. With limited access to capital and organizational resources, managers need to ensure they make the best resource allocation decision. ‘Best,’ in this sense, covers equity, efficiency, effectiveness, inclusion, and transparency, along with other issues. This requires developing a convincing business case that covers more than just the incremental cash flows that accrue to a city.

The following five steps use a case study approach that can help cities make the best decision in allocating limited resources. This produces a business case that identifies stakeholders along with a quantified estimate of the materiality of the economic and social change.

 

1. The Public Sector is Political

City officials have different objectives depending on their local circumstances. Examples include becoming carbon neutral, reducing crime rates, improving the visitor experience, delivering efficient operations, and increased transparency. Any smart city proposal must support a broader political narrative or an electoral mandate. An investment can be indicated, with a positive net present value, though if it is not consistent with a mayor’s or other elected official’s story it may not receive appropriate organizational support.

As our case study, consider a smart city application that manages the collection and management of commercial garbage receptacles. This may be consistent with city objectives of improving tourism or contribute to a wide goal of environmental sustainability.

 

2. Many Stakeholders

One technical proposal would be to install a sensor in the bin that detects a range of conditions. These conditions could include:

  • Amount of waste: This would allow more efficient scheduling reducing routing costs, the size of the fleet, and a productivity improvement in collection staff.
  • Overflow: Improve the resident and visitor experience as well as opportunity to improve the overall impression of the city.

Indicative results of the contribution of possible benefits available from the sensor technologies of amount and overflow are shown below in Figure 1.

 

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Figure 1: Benefits of Garbage Sensors

Here, the analysis takes a wide view of stakeholders, and applies in these ways:

  • City operations: There are improvements in routing, the cost of vehicle start stops, container maintenance and accessible information and fleet size which provide operational savings
  • City Employees: Productivity improvements which can be transferred into improved outcomes.  
  • Visitors: Improved opportunities for advertising and a presentation benefit based on seeing less garbage on the streets. As there are no empirical data on this benefit, the model assumes a 0.5% improvement in tourist expenditure after removing accommodation costs. (This produces a value of around 30 cents per tourist visit as a check). With this assumption, the size of the benefit that is captured by visitors is about the same magnitude as the operational benefit achieved from fleet size changes.
  • Residents: Share in the presentation benefit quantified in the tourist experience and have access to bin data for possible application development.

As sensor technology improves additional technologies may become available. This may apply in the following ways:

  • Weight. Recording the weight of garbage provides information on a “pay as you throw” approach. Services could then be priced based on weight with an offset based on the weight of recyclable materials. This could be consistent with a broader political narrative of sustainability, though not to underestimate implementation issues.
  • Contents. Information on the contents of the garbage would allow better handling of noxious products or contents that could damage collection vehicles, such as car engines or other metal objects.

 

These incremental monitoring technologies would likely be too expensive to install and maintain at this stage, though as sensor technology costs decrease they may be appropriate. Again, the quantified business case provides information on when to install these improved sensors.

 

3. Concentrated Costs, Wide Benefits

The example of garbage collection can be expanded to the general case of Internet of Things (IoT) investments in the public sector. Figure 2 below shows a schematic of one possible outcome of an IoT investment. Here, the investment:

  • Assumes that the private sector has an advantage in scale and risk management
  • Is appropriate for the public sector as present benefits exceed costs
  • Is appropriate for the private sector as the monetized benefit is greater than their costs
  • Produces material non monetized benefits

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It is easy to imagine different circumstances where the benefits and costs are not as favorably aligned. Calculating the steady state benefits for all stakeholders allows public sector managers to assess the materiality of different options and who will be the most affected.

A generic result of this kind of analysis is shown below in Figure 3 which assesses the long term steady state benefit of 16 IoT applications. The benefits accrue to the stakeholders of employees, visitors, city revenues and costs, and the wider community. The graph shows the relative materiality and the type of benefits for each application which can then be assessed against the marginal cost.

 

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Figure 3: Benefits by Application and Stakeholder

 

4. It’s a Platform

Clearly the network that is used for garbage collection monitoring can provide connectivity at marginal cost for other applications. So allocating the full cost of the network to garbage collection would jeopardize the investment. Rather, some form of marginal cost allocation needs to be determined based on likely future IoT applications.

One advantage of a platform approach is that the data can be structured so that API’s can be easily implemented. Startups and other innovators can then access data and develop application that may meet unanticipated demands. An additional benefit of open data is that it can reduce IT vendor costs as data are more easily accessible reducing the need and cost of elaborate data transformations.

 

5. Did that work?

Cities often choose to do a pilot investment prior to any decision to scale to the entire city. One of the advantage of IoT investments is that they provide a rich data set that can be used to recalibrate the initial benefit and cost analysis. This evaluation supports transparency as well as exposing any unintended consequences or additional costs.

 

Conclusion

Emerging technologies provide cities with a unique opportunity to both improve efficiency and better meet citizen and resident expectations. Managing competing demands for resources requires an understanding of the affected stakeholders and the relative economic and social impacts.

Discussion

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2 Comments

  1. Time has come to delibrate on the ‘fact or fad’ aspect of smart city investments. India very ambitiously launched a 100 Smart City Mission. Laudable – given the rapid urbanisation in the country. However – need is not the IOT but the hard physical infrastructure; sound policies and adherance to them; human resurces of all types and above all the mindset change at the decision maker level.

    Reply
  2. Coming up with a viable business case is indeed the holy grail.

    The key take away is not focusing on the technology in the first place, but building a model that shows the benefits to the people – a business case that contains data to entice investment while showing societal value beyond immediate monetary gains, usually over several years…this is the difficult part as politicians and public want instant results.

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