A recent report from ABI Research found that smart city technology could save enterprises, governments and citizens globally more than USD5 trillion a year by 2022 with each city pocketing USD4.95 billion annually.2

    And yet our most densely populated areas face a 'global infrastructure financing crisis', according to NewCities, a global nonprofit dedicated to improving the urban landscape.3

    It estimates that cities need investment equivalent to five per cent of gross world product every year from now until 2030, but suggests traditional sources of finance are being slow to plug the gap. Why?

    Julien Touati, a partner at global investment and asset management firm Meridiam, which specialises in long-term public infrastructure projects, and a speaker at HSBC's recent "Cities for the Future" conference, says smart cities present traditional investors with a number of challenges.

    "The first is the diversity of the assets that we are dealing with in this space. From mobility to low-carbon generation and data management, the smart city system is composed of many different pieces that may not all have the same risk and may not be easy to assess.

    "The second challenge is that these projects are engineered fairly small and in the infrastructure space where I come from, we like big projects – motorways, high-speed lines. You don't find that in the smart city universe, so you have to put together a lot of small assets to build an industrial platform that can be financed. That requires a lot of sweat equity."

    The SmartSantander project in Santander, Spain, has seen 20,000 street sensors installed to help officials make real-time adjustments to public services, such as the number of garbage collections and when to turn the sprinklers on in the parks.5 In Barcelona, intelligent lampposts switch the street lighting off when no one is around.6 They're examples of the myriad small but meaningful improvements that a connected city can make to everyday life while also helping to meet its sustainability targets; but a London Crossrail or a Hong Kong delta bridge they are not. Neither is the funding model for such informatics-based infrastructure clear, especially when much of the data on which it is based is crowdsourced from 'prosumers', who are both helping to create and benefiting from the service. If data is the real equity in smart cities, who exactly owns it and how is revenue generated from it?

    "Some data has value, some doesn't. I think we're all figuring out what those elements are," says Elaine Trimble, Director of Urban Infrastructure for Siemens. "On the digital side it's about getting our heads around the repayment period for these technologies."

    Large corporates like hers are learning that successful project delivery is more of a collaborative effort in the smart city environment, involving public sector, start-ups and financial institutions.

    Camen Munoz-Dormoy, CEO Citelum Group, a subsidiary of energy utility EDF, which specialises in smart lighting, agrees that the smart city's collaborative ethos requires a financial ecosystem that responds in like manner. It should also understand that value isn't always intrinsic to one project; a smart city is very much the sum of its parts.

    "Corporations and cities should work together on projects that bring in new cash or make savings. Private companies are going to make those projects possible and it's key that they deliver a solution quickly," she says. "The financial sector needs to cover the risk, but as a corporation we need to provide the best solution and technologies and deliver the KPIs that make the project profitable."

    Nicole Thompson - Director, Social Innovation & Co-Creation Partnerships, Hitachi Vantara Limited, believes the financial industry needs to play a more active role from the outset.

    "Quite often you see projects that are successful from a technical and operational level. But if you look at who is involved with those projects it's very rare that you see someone from the financial space," she says. "It's beyond just asking for funding. It's actually having a seat at the Table, participating in the discussions and helping to create that outcome in terms of a viable commercial model."

    What's clear is that city authorities can't do it on their own. Research from Black & Veatch found that only 16 per cent of municipalities surveyed said they could self-fund a smart city initiative.7 When the same researchers asked what the most appropriate financing model was, 75 per cent of respondents pointed to private public partnerships.

    HSBC's own Future of Cities report cites three principle forms of smart city investment: national governments, private-public partnerships and private finance, via the growing green bond market.

    Of these, private-public partnerships have thus far tended to produce the most creative, self-financing solutions. But the report points to green bonds as having an increasingly important role to play, given the extended payback period of many smart city projects and the growing importance attached to environmental, social and governance (ESG) issues by institutional investors.

    "A smart city infrastructure is going to generate revenue over time very progressively," says Pierre-Emmanuel Houiller, Head of Banking Technology Investment Banking in Europe for HSBC. "You may find that in the first years, it's not really profitable because we still have to find the use cases (for revenue generation). But as we collect more data, we are going to find more of those use cases and I'm ready to bet those infrastructures are going to become very profitable.

    "Sustainable finance has this long-term view and so it fits with smart cities. Those investors are also focussed on companies with a different vision of society."

    Cristina Fragola, Director of Partnership and Government relations for the Global Covenant of Mayors for Climate Change (GCoM) has experience of the Washington DC environmental impact bond, which the GCoM helped place. By using the bond, the state was able to share the risk for a non-revenue generating storm water retention project, which might not otherwise have been green-lighted.

    "It (represents) a next-wave of smart cities," she says, "where the focus is more on smart planning and smart partnerships – not just smart technology."

    References

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