Maggie Shillington, IHS Markit, outlines how to create a multi-stream financing model to fund smart city initiatives.
The number-one challenge for smart cities is securing funding for projects.
Implementing technology, coordinating disparate stakeholders and determining return on investment are all major challenges, but nothing has the singular power to kill a smart city proposal like lack of funding.
Although there is not a single solution to this problem, there is one common cause – financial risk. Because these projects are often focused on introducing new technologies and new applications to a city, there is more uncertainty surrounding them than about routinely completed initiatives such as repairing streets.
IHS Markit’s analysis of over 1,300 smart city projects shows there are some common tactics to mitigating risks.
The first way to mitigate risk is by using a public-private partnership investment.
There are three main investment types for smart cities:
In a public-private partnership, both parties have a financial stake in the success of the project, which reduces the risk and increases both parties’ interest in completing the project.
Nothing has the singular power to kill a smart city proposal like lack of funding.
The shared interest in completing the project is crucial because successful smart city initiatives are long-term undertakings, typically spanning several years. Of the projects where investment type has been recorded, nearly 70 per cent of projects used public-private partnerships.
The second way cities mitigate risk is by using multiple funding strategies for a single project. Analysis of projects in the IHS Markit Smart City Project Database shows that there are five common funding strategies for smart cities:
By using multiple funding strategies, cities reduce the financial risk of large, and often expensive, projects.
For example, if a city begins a project using a country-level grant that is de-funded in the second year of the project, the city could fall back on a shared revenue stream, like advertisement or data monetisation where the city gives local businesses sensor data that provides more insight to foot traffic in a commercial area.
By using multiple funding strategies, cities reduce the financial risk of large, and often expensive, projects.
Deploying multiple funding strategies in a single smart city project mitigates risk for cities, thus ensuring the longevity of smart initiatives.
Smart city funding and public-private partnerships will also be a key focus of our upcoming Smart IoT Connect event (London: September 10).
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