Smart Money: Developing New Funding Mechanisms for Smart Initiatives

In its annual industry survey, “2017 Strategic Directions: Smart City/Smart Utility Report,” the consulting company Black and Veatch found both overwhelming enthusiasm for the concept of smart cities and wide-spread uncertainty about how to pay for implementation. Those surveyed included a cross-section of utility, municipal, commercial and community stakeholders. Ninety-four percent viewed the smart city movement as transformational and likely to have long-term positive effects on cities worldwide. Yet three-quarters of respondents said they lacked the financial resources to undertake their own initiatives.

Traditionally, cities have paid for large infrastructure projects either with city funds raised through taxes or with capital acquired in the municipal bond market. Neither approach holds much promise for smart city financing. There is little appetite for tax increases in general and only 5% of the municipalities in the Smart City survey were willing to use property taxes to fund smart initiatives. That suggests that city leaders and residents do not fully appreciate the financial benefits of such efforts. Whatever the reason, tax-based funding of smart city projects is unlikely any time soon.

Municipal bonds face different obstacles. One is the staggering amount of debt states and cities are already carrying. Another is the unconventional nature of smart city projects. According to a 2017 report by Deloitte, “Funding and Financing Smart Cities,” projects based on inter-connectivity lack the traditional single-sector focus municipal debt financing favors. According to the report, “This inherent flexibility presents both opportunities and challenges for cities from a funding/financing perspective.”

Some funding is available from public or nonprofit sources. 2017 was a good year for smart-city grants. The John S. and James L. Knight Foundation awarded six cities — Akron, Ohio, Boston, Detroit, Miami, Philadelphia and San Jose, Calif. — $1.2 million to explore how they might use the Internet of Things to meet their needs. The Smart Cities Council awarded Readiness Challenge grants to five cities — Austin, Tex., Indianapolis, Miami, Orlando, Fla. and Philadelphia. And the U.S. Department of Transportation committed up to $40 million to the winner of its Smart City Challenge, Columbus, Ohio.

“The global market for smart cities is projected to reach $1.2 trillion by 2020.”–Global Industry Analysts

As helpful as these grants are, such direct funding is neither sufficient nor reliable enough to fund smart cities long term. Utilities represent a potentially steadier partner, said University of Pennsylvania professor Howard Neukrug, who is also director of the Water Center at Penn. “Water utilities are not wealthy, but they do have some money,” he said. In fact, Commissioner Debra McCarty said that the Philadelphia Water Department (PWD) currently has more than $320 million in its annual capital budget, although Neukrug, a former commissioner of the department, said that PWD actually needs a capital budget of $600 million just to fund needed repairs and improvements, let alone innovative smart technologies.

Still, he said there are opportunities in Philadelphia and elsewhere for smart city programs to partner with water utilities and leverage their spending on infrastructure. Smart city networks looking to lay underground cable, for instance, can take advantage of water utilities’ continual investment in repairing and replacing pipes beneath city streets.

The private sector offers more robust financing options.

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