The Importance of Funding for Smart City Projects

Enthusiasm for smart city technology initiatives is common throughout the world, but just how are these projects going to get funded? This is the question everyone has. In fact, the International City / County Management Association’s (ICMA) recent survey of local governments found that almost 40 percent of respondents claimed they needed additional money “to sustain infrastructure at a baseline level” and indicated that their current state of the infrastructure is hurting quality of life.

The US is thought to be a wealthy country, yet cannot support its existing infrastructure. This leads us to ask how governments around the globe currently foot the bill for infrastructure basics, and how will they raised money needed for more advanced investments?

In India, economists say that their smart city plans desperately need to develop sources of private financing to become reality and suggest US-style municipal bond market solutions.

“One predominant feature of urban local bodies (ULBs) in India has been the lackluster flow of private capital,” said Shamika Ravi and Ankit Bhatia, a Research Assistant at Brookings India. “The improvement of smart cities in India, however, will essentially hinge on the ability of those cities to improve their own revenue, raise local finance and attract greater private investment.”

In addition to funding, municipal bonds also bring the benefit of broad citizen participation which will also develop awareness and knowledge for further growth.

“Currently, India’s municipal bond market is largely untapped,” they say. “Because of severe constraints in both supply and demand, only a limited number of ULBs have the experience of raising funds through municipal bonds.”

In the US, public–private partnerships (P3s) are another financing option, though they require a healthy return on investment (ROI) for the private partners.  Though P3s may work for larger municipalities, smaller cities may not have the right opportunity or knowledge to construct deals with private investors. As a result, regional programs become more appealing, as cities can come together within a county to provide the resources necessary and a larger base to provide adequate revenues.

Pam O’Connor, a Santa Monica, California councilwoman, said of regional collaboration, “I think that’s going to be the model going forward.” Given the rapid changes in smart city technology, officials can draw on a much larger pool of expertise to get technology and process recommendations vetted by experienced professionals. They can then make well-informed decisions, avoiding tech solutions that will be outdated rapidly, while best serving their agencies and budgets.

There is also an increase in sovereign wealth funds that are supported with revenues collected by the states from natural resource industries such as the oil, gas and coal sectors. “You’re seeing an increased interest in how these funds can potentially invest in infrastructure,” said Joshua Franzel, Director of Policy Research for ICMA. But, he added, this trend was for now limited, and “we’re not seeing a sea change.” Read more here.