Understanding The Necessity of a Strong Financial Model for Smart Cities

Smart Cities- the term is enough to say that it requires modernized infrastructure with smart technologies. To make this possible authorities need lucrative and adequate finances to make the visionary plan turn into reality. Hence they need a strategic layout on how to communicate the same to attract investors and collaborators. Therefore to fit into the constrained budget, they need to identify models that can help to attract private financing to make the introduction viable and financeable. Besides, authorities also need to look into the sustainability of these models which may be implemented. This is important to bridge the financial gap in funding, and meet the litmus test of opportunities presented in terms of automation and digitalization of the proposed smart cities.

The most common solution would be to invest in public funds and own-source revenues or seek federal funding. Other viable options may include, adoption of asset recycling and value capture. While in the former the government can sell or transfer new leases for older infrastructure projects to generate the seed funding for newer ones, later includes project teams produce value for an infrastructure project by leveling a special tax on companies that gain direct profits from the smart city initiative or by charging impact fees on developers. For instance, in China, monetization was one of the main sources of financing for Chinese cities like Shenzhen, Zhuhai during the Special Economic Zone (SEZ) development phase of the eighties. Apart from brands and enterprises investing in smart cities, the government draws money from tax sources like property taxes, advertisement taxes, entry (Octroi) taxes, and so on. Further, there is soft capital, also known as in-kind capital in which these stakeholders offer products or services, infrastructure, or access to leadership/intelligence at no cost which can help grow a smart city project without the financial outlay.

But there are few clogs in this pipeline. According to a Deloitte report, one of them is a technological risk. This happens when a certain project is an early adopter to deploy a particular technology. This reduces investors' confidence in the integration and usability of the technology in the absence of concrete proof that the technology will undoubtedly be delivered up to the decided standards and generate enough return of investments. Not only that generally, but investors also look for long-term projects which may not be always possible in case of smart city projects.

To counter these blockages we need a model with defined objectives and expected outcomes. This can assure participating shareholders to adapt themselves and their policies to achieve a common goal. Next, develop an inventory of existing assets that may be available for use by the smart city project. In areas that are far from the main hubs of these smart cities, which fail to evoke interests of the investors, authorities can implement an impartial regulating body that shall enable correct calculation and monitoring cost of service that use smart technology to facilitate their offers and use a cross-subsidy model to impose various user charges across different user groups for service cost recovery. These may include companies handling different parts or phases of smart city programs like smart street lighting, houses, water supply, and so on. Finally, after understanding and analyzing the project requirements and key roles and values of stakeholders, it is time to focus on the economic side of the model.

We need to check into available options of public, private funding while also considering the monetary value of the asset. It is also important to figure out how the projects will generate revenue and free cash flow, is there a need for additional or backup funding if the project is having difficulty in meeting the deadlines and is the value direct or indirect. After this, pre-requisite draw a plan to procure funds from the interested parties an prepare for execution.
While there are certain further complexities and steps and bureaucracy involved in successfully attracting the investing parties and other financial hubs, one thing is sure, that we need to update ourselves from the traditional methods of seeking money to manage them under the mercy of municipal boards and banks. It is undeniable that one needs a robust, secure, innovative models under the right policy, regulatory, and institutional framework for a sustainable or symbiotic financing partnership for the new urban landscape.