Remourban – a five year, European funded project involving partners across Europe working together to achieve a sustainable urban regeneration model – is studying four financing options that can be used to support smart city projects. These are public-private partnership, tax increment financing (TIF), green bonds, and engineering procurement and construction (EPC) contracts.
Public-private partnerships continue to be the most popular means of financing city innovations, as they are considered to be the most viable solutions and public authorities are usually open to implement them. “You can have more financing from the market and get small and medium enterprises to grow at the same time. These two sides of the market are very important,” Alessandra Cassisi, from the Officinæ Verdi group that works with Remourban, said.
Green bonds are a tax-exempt bond issued by federally qualified organizations or by municipalities for the development of brownfield sites. Brownfield sites are areas of land that are underutilized, have abandoned buildings or are underdeveloped, often containing low levels of industrial pollution. Usually investors take high risks, because the success of an innovation cannot be certain, but the returns are tax free.
“They are the new big thing. They are quite attractive as an instrument that can be issued by municipalities to collect funding,” Cassisi explained. “It can be the starting point of aggregations of numerous smart city initiatives, to increase the level of investments and diversify risks, but there is lack of knowledge on how to use this tool. The legislation and regulation system is quite vague, so it needs reinforcement.”
Tax increment financing essentially means banking on the increase in property tax revenue that will result when a development project is finished. The government can “fund” a project by pointing to the revenue the project will generate once it’s complete. The biggest risk that cities run when engaging in tax increment financing is that the expected tax revenue will never materialize or will be insufficient to cover the money spent on the project.
Engineering, Procurement, and Construction contracts (EPC) see a single contractor take on the whole project. Cassisi says, “they could be an appropriate local instrument, as they are more related to the local specificities, rules and markets.”