Gary Thompson 22 October 2019

Smart Cities: The critical importance of private sector finance

Research from Siemens Financial Services shows public funds alone fall far short of the resources needed to develop smart cities. Smart, sustainable financing needs to be harnessed from the private sector.

The acceleration of Smart City initiatives has become one of the most important global developments in public sector digital transformation, as the global market is set to reach US $1.56 trillion within the next five years. With 68% of the global population expected to live in cities by 2050, it is unsurprising that major cities are increasingly undertaking strategic initiatives to become ‘smarter’, as a means to tackle some of the issues of modern urbanisation such as congestion, pollution, and other environmental threats such as flooding or contamination.

As cities grow in complexity, there is a search for new, smart design and business models to enable continued growth in a more sustainable manner.

In the UK, several pioneering cities are leading the way in urban digitalisation through smart city initiatives, including Bristol, Cambridge, Glasgow and London. These are important examples of smart city progress, but on a global scale these pioneers do not represent the majority of cities. With large-scale smart strategies requiring significant capital resources, only a handful of ambitious cities are willing to transition - research suggests an estimated 26 fully-fledged Smart Cities by 2025.

As cities look to upgrade their infrastructure with smart technology, paying for those projects presents a significant challenge. While historically, the public sector has been the first choice for funding, there is now a growing realisation that public budgets are usually inadequate to fund the necessary digital changes of smart city development for the majority of cities. Out of the 150 local authority representatives from around the world interviewed for a recent report, one in 10 claims to not have the capacity to develop a smart city programme, with 23% stating budget limitations as the main inhibiting factor. Taxation revenues are frequently overstretched simply to cover the public sector’s operational expenditure - leaving the public purse with little spare change for innovative investments.

In the UK, local councils are estimated to face a £3.9bn funding black hole in 2019, after main government grant funding for local services were cut a further 36% this year.

With limited public funds, accessing private sector finance for technology projects is becoming commonplace and local authorities are, more than ever, seeking creative funding solutions to bridge the funding gap between current budgets and tomorrow’s smart potential. A report from Siemens Financial Services (SFS) estimates that more than € 6.21bn could be available in funding from the private sector in the UK for these smart initiatives. For a typical city, this could mean a 10% increase in investment capacity, compared with their capital budgets over a five-year period.

There are clear benefits of investing in smarter cities including improved competitiveness and sustainability. At a time when budgets are being constantly squeezed, an increasing number of cities are now approaching smart transformation though a series of smaller, low-risk smart projects which are better funded through some form of private sector asset finance arrangement. Fixed visual surveillance, advanced public transit, and smart outdoor lighting are the three largest use cases, collectively accounting for nearly one quarter of global smart cities spending in 2018.

One example of these initiatives is Westminster City Council’s SmartPark solution, which utilises a network of over 3,400 radio-frequency identification (RFID) equipped in-ground vehicle detection sensors in order to provide motorists with real-time information on unoccupied car parking spaces. With parking occupancy levels often in excess of 80% in London’s West End, the programme aims to reduce congestion in the capital’s city centre location. Unsurprisingly, people-centric technologies, like Westminster’s SmartPark, are cited as the primary technologies that will be used to support smart city initiatives in the next three years, such as cloud-based technologies (93%), IoT sensors and wearables (86%) and mobile apps (86%).

Complementing public budgets with private sector funds will enable cities to successfully invest in smart technologies and begin to experience its benefits in a timely fashion. The savings generated by smart initiatives often render them effectively zero-net-cost investments.

Glasgow’s Future Cities initiative, an innovative programme aiming to make life in the city smarter, safer and more sustainable through technology, has already delivered a return on investment of £144m, with an estimated £5m saved just though its traffic management, security and public space CCTV programme, and has attracted a further £12m in external investment. In light of these results, it makes strategic sense to deploy private sector finance on clearly self-financing smart projects, and reserve public funds for projects where return on investment (ROI) does not have such a solid track-record.

Councils wanting to upgrade their technology solutions should consider the benefits of a specialist financier, one who has a deep understanding of both the challenges and requirements of public sector financing. Unlike traditional generalist financiers, who might lack comprehensive technical knowledge to fully evaluate the impact a potential investment can bring to the council, specialist financiers understand the technology and its practical application in the public sector.

Expert financiers are able to offer customised packages, tailored to fit the city’s particular circumstances and cash flow needs, which intelligently spread the cost over an agreed financing period, and flex to ensure that monthly finance payments align with expected benefits gained over time from new/retrofitted equipment. This removes the need for a large initial outlay, thereby increasing the funds available for other expenditures.

Such agile financing methods are a recent development and are increasingly valued as separate lines of finance for cities hoping to embrace additional technology acquisitions without having to commit scarce capital or use traditional lines of credit – which can be a long and bureaucratic process. In this way, the financing terms available with specialist financing partners allow cities to incrementally build their smart technology base over time, taking the next step only once a clear benefit has been realised from the previous phase.

Furthermore, the use of private sector financing techniques can help increase transparency and improve governance, through their application processes and reporting structure. Tailored asset financing packages make it easy for financial managers to understand total lifetime costs and therefore calculate a dependable ROI – a significant advantage for transparent financial planning and managing the good opinion of city stakeholders.

Finally, finance providers specialising in urban technology applications tend to remain committed to serving the sectors, even when economic circumstances tighten. This is important for long-term city business planning – knowing there is a dependable financing partner who will be prepared to finance technology needs over time, and who will not abandon the market when times get tough.

When public budgets are tight, asset finance provides a way to spread the outlay and not tie up precious public sector capital. The reality is that cities need to access a blend of public and private sector finance to accelerate their smart initiatives in a timely way and benefit from the resulting savings, efficiency, and citizen service improvements as quickly as possible. By drawing on a widening range of financing sources and techniques, cities are able to maximise their access to finance. The public sector will need to continue to work in a more flexible and innovative manner with the private sector, in order to usher in the next generation of city building.

With Smart city investments displaying an array of benefits, the longer the investment is delayed, the further behind a city falls in attracting business and people, along with the economic growth and increased taxation revenue they bring. To delay is to incur an opportunity cost, so all sources of finance need to be deployed.

Gary Thompson is UK sales director at Siemens Industries and Markets, Siemens Financial Services (UK)

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