How can smart cities finance their transformation?

How can smart cities finance their transformation?

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Smart solutions are innovations. Therefore, by nature, they’re often new and untested - which is a scary feature for potential investors, who want safe and predictable results. So what are some attractive financing schemes for “intelligent” cities?

Local governments in Europe are notoriously risk averse, city council officials and industry leaders won’t hesitate to tell you. “They have a set amount of money, and they’ve got to have a set impact on their residents,” Nathan Pierce, smart city expert with thirteen years’ experience in public sector, told “These public authorities have got to improve congestion and housing, provide better energy, etc. If they get something wrong, they don’t have endless amounts of money to find a solution to get it right.”

Smart solutions, which are often untested innovations, may look like giant risks to governments. This is where the EU is making giant strides. 80 cities across Europe are collaborating to share their expertise and encourage each other to invest in new technologies, under 12 EU Smart Cities and Communities Lighthouse projects. “The solutions are not so bespoke to a city that you can’t implement them on a wider scale,” said Pierce, who is chairing the board of the coordinators.

One of these projects, Remourban, is studying four financing schemes that can be used to support smart interventions. These are public-private partnership, tax increment financing (TIF), green bonds, and Energy Performance Contracting (EPC) contracts.

Alessandra Cassisi, from the Officinæ Verdi group that works with Remourban, explained that public-private partnerships are one of the most popular means of financing city innovations. According to her, they are 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,” Cassisi added.

However, involving the private sector can also be controversial. Some concerns include the risk of limiting competition, if only bigger companies can take on the tasks at hand. According to Jorge Nuñez from the think tank Centre for European Policy Studies , “to minimise risks there needs to be absolute clarity as to the rules applicable to contracts, as there’s no other choice, the private sector must be involved.”

Another financing option for smart cities are green bonds, tax-exempt bonds handed out strictly to develop sustainable projects that generate environmental benefits. 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.”

Expert Nuñez agreed and added: “If you have green bonds at the European level, you reduce their risks.”

Tax increment financing, Cassisi said, is the most difficult scheme to drum up enthusiasm for because such measures may be unpopular with citizens.

People may worry about raising tax rates. Typically, a municipality identifies a district to be restored, and re-allocates funds from property taxes to develop the area and encourage investment. The additional tax money generated by the higher property value is then reinvested in the same district.

Finally, 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.”

Remourban, which will end on December 2019, is in the process of assessing these various schemes. The project is active in a number of cities, including the three “lighthouses” of Valladolid, Nottingham and Tepebasi, as well as the “followers” of Seraing and Miskolc.

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