Money Matters: Who Pays for the Smart City?
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The “smarting” of utilities and cities is underway. However, many in the industry would stamp our smart city progress thus far as meh, even though the foundational technical elements are in place.
Delaying smart development comes at a huge cost to humanity. “Smarting” must happen to respond to challenges such as the growth of renewables on the grid; rapid population growth in already strained cities; the need to respond to climate change impacts, particularly along the seaboards; the adoption of aggressive Climate Action Plan (CAP) goals; growing adoption of electric transportation; and a new era of self-driving vehicles. We have enough technical tools in the toolbox. What is holding us back? Opinions might vary, but here is my take on smart city snags:
- Funding
- Regulation
- Traditional business models
- Attitudes
- Procurement procedures
The industry feels the wallop of these hitches. For example, I recently attended “San Diego Solar: An Energy Dialogue,” hosted by Cleantech San Diego. Although utility and the other panel members agreed that the ultimate goal should be the support of 100% renewables on the grid, they were at total loggerheads on how to achieve it! The given reasons matched most of mine above, and these threaten to hinder progress regionally and even globally, where similar debates are raging.
Let’s focus on one of these areas relating to U.S. cities: funding. This issue overlaps the other reasons on my list, which all play a part in why smart city development projects are lagging.
For sure, cities are facing a massive dilemma regarding smart city funding. Many cities have signed up for aggressive CAP plans, struggle with aging infrastructure, face tremendous resource pressure, and struggle with clogged roads and a demanding public, who is likewise struggling to attain a higher quality of life. The struggle is real. And while everyone wants solutions, the necessary “smarting” to ease these pains requires huge sums of money. For example, the expected upgrade of Chicago’s aging streetlights and related infrastructure could easily cost several hundred million dollars. A city could raise the required capital for this type of infrastructure project in traditional ways, such as by increasing taxes or issuing bonds, but these methods require public/business appetite and support. Increasingly, cities are bucking previous methods and igniting creative, out-of-the-box thinking instead.
Last year, one major California city showed an example of out-of-the-box thinking when it issued an RFP for an LED streetlight upgrade. In essence, the request said, We want to upgrade our remaining streetlights. We have no money to contribute to the project, but we have assets and a willingness to listen to any ideas around solving our challenges.
Perhaps a little surprisingly, many companies including Black & Veatch stepped forward to hear more, and ultimately stir their creative juices. At the pre-bid meeting it became clear the traditional RFP response would not work. Seeing the need for procurement flexibility, the city then thoughtfully requested that interested parties submit brief concept proposals that would be used to shortlist prospective candidates. This allowed interested parties to submit ideas without wasting thousands of hours responding in the traditional way—a fact that would likely have precluded many entities from even participating. Now everyone, at least at the outset, could see what novel ideas would stick to the wall.
The city invited innovation. In response, the respondents’ asked, “What organizations can we bring together to solve the city’s challenges and leverage the city assets so everyone wins? How can the city get its smart streetlights and the project partners still make money?” Of the concepts shortlisted, I’d wager a number relied on public-private partnerships (P3s).
Add to that even more creative thought — about how the operational savings and revenue streams generated not only support the lighting upgrade but also provide additional fundamental smart city infrastructure — and suddenly we’re turning up the heat on smart city development.
Now, I’m not saying that all smart city upgrades can follow this funding strategy. However, it does illustrate new, radically different financial approaches to explore and test. Not all of these financial approaches will work, but a growing arsenal of tools and acceptance of the fact that rapid progress requires a major change in financing, business models and procurement practices will go a long way to fuel the required smart city revolution.
The trend in financing innovation is a herald of a new age and a call to action. The industry needs to reframe their business construct to support new funding arrangements that underpin smart city progress. For example, Black & Veatch now has its own finance agnostic infrastructure lender, iMG, and relationships with other financing organizations. Technology enablers need to undergo their own form of “smarting” to better help cities, utilities, and others that want to keep projects off their balance sheet, and use mechanisms like P3s, performance contracting, private debt/equity, infrastructure funds, pension funds, revenue bonds and tax-exempt financing. Creating an ecosystem of technology players, and keeping a vendor-neutral status, ensures best-fit technologies for smart city initiatives.
Regardless of the funding approach, time is of the essence. The longer we wait to progress the smart city, the more we have at stake.
For more insight into smart city trends, review Black & Veatch’s Strategic Directions Smart City/Smart Utility Report (2016).
This blog post is part of a series. Read the next post: Smart Systems in the Second Machine Age
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There is no escape to ‘Smart Funding for Smart Cities’. Live example is of the 100 Smart Cities Mission of the Govt. of India. Except for the initial stimulus grant from the Govt. of India, the selected Cities need to find their own sources. Many exisitng and new models – debt-equity funding, spend and recover, derisking by the Agencies, annuity and hybrid annuity model are some under trial. Too early to say about the success or othewise of these approaches. CITIES must first inventorise their current assets and cash flow streams and project them into furute with the planned infrastructure been created.