Bright lights, big city: the opportunities to finance smart technology

As cities globally look to upgrade their infrastructure with smart technologies, paying for those projects presents a significant challenge to local governments. Factors like poor implementation strategies, change fatigue and limited resources can make it difficult to finance smart cities projects with the COVID-19 pandemic adding an extra layer of complexity.  

However, many of the most common obstacles can be addressed by attracting private financing in order to make the adoption and upgrade of smart technology viable and financeable. Here we are talking about technologies like smart CCTV, lighting, speakers and emergency systems, as well as smart meters and traffic signalling tracked by data centres. These are all based on interconnectivity — Internet of Things, Wi-Fi, fibre optic cables — and soon to be widely underpinned by 5G.  

More broadly, a smart building is any structure that leverages automated processes to provide data and control critical operations that include heating, cooling, ventilation, security, lighting, communications, and many other systems. Smart Building Technology further helps by providing city building managers with real-time data on system performance, helping to reduce operational costs while optimising energy use. 

The COVID-19 pandemic has accelerated the adoption of this technology while forcing both corporates and local governments to look beyond the traditional, single-sector focus that conventional financing favours. The shorter-term nature of technology-related projects may previously have placed them outside the remit of some investors but “Netflixisation, or the trend towards subscription models, is adding a more creative approach to funding and financing sources. As such, these opportunities are starting to mirror the revenue models used in the wider digital economy.  

When planning a smart city project, it is important to remember the difference between funding and financing. With funding, the government provides a specific amount of money for a specific purpose with no expectation of repayment. With financing, someone (usually one or more financial institutions) provides an amount of capital (debt or equity) to a project with the expectation that it will be repaid with interest. 

The appetite for such projects by Australian State Governments is hard to overstate. Recently, NSW Minister for Customer Service Victor Dominello committed the NSW Government to building smart technology into infrastructure and buildings in a move he said would create jobs, cut traffic and commute times, slash water bills, reduce crime, and boost the economy while helping to meet green infrastructure targets and turning New South Wales into a "smart state". 

“Data and precision modelling is just as important as bricks and mortar. Information is power and technology should be embedded in every major infrastructure project,” Dominello said in an August media release. “Similar strategies have worked effectively in other global centres including Dublin, Barcelona and Boston. We cannot be spectators on the sidelines – we must lead in this arena.” 

As Australia’s largest cities emerge from COVID-19 lockdowns with lower commute numbers than usual, it is an ideal time for smart city initiatives to put a digital overlay on physical asset, opening the way for unprecedented opportunities, increased productivity, and new revenue streams. A clear funding stream is especially critical if the project is seeking private financing. This creates opportunities for vendors and partners to find creative ways to generate revenue from the solutions and services they provide in each layer of the business architecture.  

An example of this is Maia Financial and Smart Parking working together on a finance package that enables councils to continue to fund important smart city parking projects without the need for red tape and CAPEX signoff. This package is designed to provide flexible finance options through low-interest rates and a ‘zero upfront’ Smart Parking monitoring and enforcement solution. 

Along with more traditional funding strategies, a city can use value capture to provide a contribution to the budget for a smart city project. Direct value capture generates value directly within a project, using strategies such as revenue sharing, profit sharing, refinancing gain share, user fees, and impact fees. However, funders need to be aware that asset recycling is less of an option with smart technology as assets are likely to date quickly and lose their utility if not part of a greater ecosystem.  

Digital acceleration was an aspiration for many city authorities long before the COVID-19 crisis hit, with the United Nations estimating that 68% of the world’s population will live in urban areas by 2050. However, the pandemic has highlighted the need for accelerated digital city planning and greater communication with citizens for such population levels to be sustainable. There has also been the realisation that while tech is a critical enabler, what is actually at the heart of smart cities and communities is creating better places for people to live, work and play. This offers some incredible opportunities to reimagine how our communities should look and how we interact with them.