Financing Tools for a Smart City
As expansion and urban growth press upon the need to find ways to finance infrastructure upgrades, cities have become bolder and more experimental about funding options. One of the biggest challenges is that the attitude to funding is still cautious after one of the most significant global economic crises in generations. How can cities and other public entities that want to establish a smart city by upgrading infrastructure with smart technologies find investors and financial institutions willing to finance the projects?
One of the best ways to overcome financial obstacles is to explore creative approaches that focus on both short-term and long-term goals. Of particular importance for cities is selecting the right financing tool at the right time. There are numerous ways that these tools can be combined—in fact the permutations can be extensive and overwhelming. What follows is a synopsis of the most popular tools within two categories: government-based tools and public-private partnerships.
Government-based financing tools
While cities have access to a bevy of funding sources, General Obligation (GO) bonds are an important way to finance the smart city. There are two common types of municipal bond instruments: GO and revenue bonds. GO bonds are typically used to finance basic core infrastructure investments at the local level of government, such as parks, libraries, schools and so forth.
The GO paradigm means that the issuing entity—city, town, county, school district, etc.—backs the issuance of the bonds with the full faith and credit of the jurisdiction. According to the Smart Cities Financing Guide, this translates to “the jurisdiction will tap its tax revenues at a level sufficient to repay the bond buyers plus interest.” The beauty of GO bonds is this: Selling bonds can bring immediate capital for project construction, but the repayment of the debt takes place over the life of the asset created. GO bonds represent a safe bet, as they are distinguished from other bonds by their guaranteed payback.
California voters passed the largest GO bond package ever offered on a single ballot in 2006 to address transportation, housing, education and flood control issues and implement the state’s Strategic Growth Plan. The funds allocated to the transportation sector went to congestion reduction, highway and local road improvements, safety and security – all important components of a Smart City.
A second popular form of municipal bond is the revenue bond. While tax revenues guarantee the GO bond, a revenue bond is paid back from revenues generated by the project itself. Some municipal projects, such as parking garages that can generate revenues, or possibly energy projects that save more than the annual debt payment, can lend themselves to being financed with revenue bonds.
Cincinnati proposed an ambitious plan to upgrade the city’s parking meters and build a downtown parking garage that involved revenue bonds. Under the proposal, the smart meters would be installed on existing poles and accessible remotely by smartphone users. The city eventually approved a less ambitious smart parking initiative, but the example helps illustrate the possibilities.
This method of financing offers a more collaborative approach, by which public sector and private sector interests align over a shared project. During the past 25 years, this partnering approach has garnered more respect and attention as a viable funding strategy. Public officials recognize that working with the private sector has distinct advantages. It tends to have access to larger pools of capital—human, knowledge and financial.
According to the guide, “Public-private partnerships—sometimes referred to as PPP or P3—are agreements between a public agency (federal, state or local) and a private-sector entity that uses the specific skills and assets of each sector for the delivery of a service for the general public.” Although P3s are complex, there is huge potential in these kinds of partnerships. Ultimately, the aim is to balance responsibilities, risks and rewards among all parties involved. The goal of P3s is to create a unified front that can do more than each one is capable of on their own: An alliance between the public good with commercial objectives designed to enhance both the public and private bottom line.
Cities interested in investing in smart technologies often face substantial upfront costs, and for most, this poses a challenge due to constrained budgets. Yet partnerships with private sector companies can be particularly useful because they can offer technical support, capital funding and oversight of operations.
The reality that these financing tools reflect is that many Smart City initiatives have multiple components that require multiple funding sources. It’s not just a matter of going big—it’s a matter of being diverse and nimble. Combinations of financing tools can provide additional flexibility to local officials, and in this changing, fast-paced urban environment, flexibility may indeed be the most critical prerequisite for success.