How to finance a smart city project

Having great ideas to create a smart city isn't enough if budget dollars don't add up. Here are ways that some cities are financing smart technology.
Written by Teena Maddox, Contributor

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One of the biggest concerns for city leaders is finding financing for smart technology. Sometimes it's not possible to reallocate existing city funds for a new project, and going through traditional steps for municipal bonds can take months or years.

Federal funding is one option for U.S. cities seeking to become smarter. The White House announced in late September that it would make an investment of $80 million for smart cities, expanding upon an initiative that began in September 2015. This includes $15 million to improve energy efficiency through data gathering, $15 million for research in improving transportation, and $10 million for natural disaster response programs.

In addition, the National Science Foundation is allocating $60 million in new funding for its Smart Cities Initiative. This funding will cover a research task force seeking solutions for cities, expanding internet architecture within cities, transportation efficiency, health research, and networked computer systems.

That's not all the federal government has given toward smart city technology. In June 2016, the U.S. Department of Transportation selected Columbus, Ohio to receive $40 million to prototype the future of urban transportation, out of 78 cities that accepted its Smart City Challenge.

Multiple sources are available

There are multiple sources of capital/financing for smart city technology and different options for what that capital will look like, according to Minh Le, Managing Partner, 22 Capital Partners. Avayapartnered with 22 Capital Partners to prototype the smart city platform in the Gramercy District in the Washington, D.C. area.

Some sources for capital include government, academia and private entity funding, Le explained.

"Government can provide hard capital such as grants or by issuing a RFP which a vendor can then win a contract against. With academia, you could receive investment from endowment sites and with private entities, you can seek VC funding or sponsorship," Le said.

"There's also soft capital,or 'in-kind' capital whereby these entities offer products or services, infrastructure, or access to leadership/intelligence at no cost which can help grow a smart city project without the financial outlay," Le said.

Bob Billbruck, CEO of B2 Group, said that he considers the key resources to be private enterprise, government and municipality funding, private placement bonds, the private equity market, corporate bonds, money market and banks.

The Smart Cities Council also helps cities acquire funding. The council is a for-profit association that works with partner companies to advance the smart city business sector. The council has issued a challenge in partnership with the White House to give away five Smart Cities Council Challenge Grants to help five U.S. cities apply smart technologies to urban livability, workability, and sustainability. Each winning city will receive a range of benefits, including a one-day Readiness Program workshop, as well as AT&T IoT starter kits, a smart city consultation, a free hosted smart city communication network for one year, and free access to the Telit IoT platform. The council will begin accepting applications on October 31, 2016, and the deadline to apply for the five grants is December 31, 2016.

Use creative approaches when necessary

Jason Nelson, executive director for partner engagement at the Smart Cities Council, said financing smart infrastructure is expensive and requires creative approaches that include short-term and long-term goals.

The council states in its Smart Cities Financing Guide, "The challenge with many of the newer smart city technologies is that would-be investors see them as high risk because the ROI is uncertain. On the other hand, many projects that have uncertain ROIs can be financed through traditional sources, albeit with lower levels of debt financing. However, projects that embody some element of technology risk--first-of-a-kind projects, for instance, cannot attract debt financing and generally require guarantees or other forms of credit support (or all equity financing)."

Billbruck said, "We see many different areas where groups are compelled to participate, but there is a lot of risk to be in the market."

However, renewable energy is a big motivator, since it conserves our carbon footprint and the ROI on using renewable energy sources is easier to quantify, Billbruck said.

"Obviously we're living in a political time frame, but right now the politics, the image return, for politicians and other government officials playing into this. It attracts interest and potential impact investors. So some of these groups with large amounts of money...might not be aware of the impact smart cities are having," Billbruck said. Reaching out to these potential investors is an untapped market.

Working with private partners

Joshua New, a policy analyst at the Center for Data Innovation, said, "If federal grant funding is unavailable, public-private partnerships are likely the most accessible options for many cities interested in deploying smart city technologies. Since smart city technology is relatively new and untested at scale, the perceived risk of this technology reduces the willingness of public officials with limited budgets to take on these kind of ambitious projects. Because of this however, many technology companies are eager to work with the public sector to share the costs of smart city deployments and demonstrate the value of the technology."

Arvind Satyam, managing director of business development for smart and connected communities at Cisco, said that traditional financing is an option, but companies such as Cisco work with cities to partner with them on technology projects as well.

The ROI is obvious for some projects, such as LED smart streetlights, because the energy savings from the LED lights pays for the cost of the installation within a few years.

"Over the course of the last two years we've been working with financiers and banks and pension funds and they said, 'this is a really interesting business,'" Satyam said. "It's an economic model that makes sense, when you can do multiple things. If you can deploy a network where an urban operator comes in and manages and starts modernizing lighting, sharing data on traffic, sharing data on environment noise, and other things, you start having one network with multiple capacities, and net new revenue for the city in the case of parking and other data models."

Satyam said Cisco has more business use cases to share now, and "the takeaway is how do you bring the infrastructure investors into the equation. We're confident now that the technology is more mature that they're actually interested in putting money aside for this."

Senthil Gunasekaran, head of corporate development and strategic alliances for TCS Digital Software and Solutions Group, said that Philips Lighting and Ericson are also among the companies offering public-private partnerships.

"They are participating in an LED street lighting venture where Philips will offer cities LED lighting for a fee and Ericson will use the light poles to install mobile telecom equipment and provide broadband services. This provides the city with upfront costs and prevents the need for raising capital investments," Gunasekaran said.

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