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Funding Is Key Hangup in Deploying Smart City Projects

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An increasing number of cities are ready and willing to embark on smart cities initiatives. That’s the good news. On the flip side, most cannot figure out how to pay for these efforts. Only 16 percent of cities could self-fund a smart city initiative, according to Black and Veatch’s newly released 2017 Strategic Directions: Smart City/Smart Utility Report. The engineering and consulting firm heard from over 700 civic leaders, utilities and others. While the report spans a range of topics, the data on municipal funding is especially stark.

“Just over half of respondents say efficiency and cost reductions are the major reasons to do these kinds of projects, and yet three-quarters say they don’t do them because they don’t have enough money. So we see a real contradiction there,” said Fred Ellermeier, vice president and managing director of Black and Veatch’s smart integrated infrastructure business.One-third of respondents said they flat out cannot self-fund a smart city project right now. Digging into the data, researchers concluded that while the problem is part fiscal — the money just isn’t there — credibility is another main sticking point. Civic leaders say they can’t fund this work because they aren’t entirely sure about the payoff.

“Partly this is about the reality of our cities’ economies. But there is more to it. As we look at these responses we see some skepticism over whether these systems are really going to pay back,” Ellermeier said. “The prospects are not fully understood.” Structural changes in city government are helping move the needle, as more data-savvy professionals rise in the ranks, but that alone hasn’t been enough to make the sale. “We see more and more chief innovation officers, but there is still a broad base of uncertainty and even skepticism about the real payback on technology deployments,” he said.

At the same time, forward-thinking leaders want to find out whether smart city technologies can in fact deliver promised benefits. To get there without dipping too deep into local coffers, many say they are willing to share the risk. Three-quarters of survey respondents say public-private partnerships (P3s) will be the secret sauce in the smart cities funding mix. “This shows that they are open to new models, and that’s important,” Ellermeier said. “They are looking for ways to fold in more than just the municipal layer in the establishment of new technologies.”

With such strong support the P3 model, Ellermeier offers a word of warning. Based on his own firm’s experience, he said, “the P3 is not a panacea. This model is difficult. It isn’t always easy to establish the win-win when private entities bring money to the public interest. It can be very difficult to organize where the cash flow goes and where the revenue falls.”

Given the potential complexities, it is perhaps not surprising to see civic leaders giving significant consideration to alternate forms of funding. While only 5 percent of respondents said property taxes might be levied to fund the work, many did see room for other forms of government support. Half of respondents said government grants and subsidies could help spur smart city activity, and 40 percent endorsed tax incentives as a potentially effective tool for bringing new civic tech to the table.

These mechanisms have gained traction in some sectors and are showing positive early results. “When we look at the renewable energy industry, for example, in the places that are already using grants and tax incentives we are seeing more rapid adoption as well as the opportunity to scale, which helps to make the technology become more competitive with traditional forms of energy,” Ellermeier said. “The government can give it a boost.” But smart city technology isn’t just a mark in the debit column, proponents say. When done right, civic tech projects actually can add to the municipal bottom line. Asked how that might happen, 49 percent said their cities could see increased tax revenues from energized economic development activity.

Take smart street lights as a single example. “The opportunity to have safe streets where the public is comfortable makes an incredible difference in terms of economic benefit to retailers and store owners,” Ellermeier said. “When the public is willing to come out in the evening, the business community benefits.” Tech-centric parking could have the same effect. “The ability to know that they can get a parking space downtown leads directly to people coming into the city and spending money. In that sense, the technology directly impacts the vibrancy of the city, and that has economic benefits,” he said.

On the flip side, civic leaders were far less sanguine about the possibility of advertising revenue serving as an offset to the cost of smart technology. Only 18 percent of respondents thought that that was going to happen. In fact, cities have had some success in renting out ad space, for example on smart signage. The report highlights Kansas City, Mo., which in May 2016 began installing a system of 25 interactive outdoor kiosks along the downtown streetcar route. The kiosks serve up civic information and also generate ad revenue.

“We know this works, but for many cities it’s a matter of priorities. Right now they are just not thinking about this, but it will snowball as cities begin to see the successes that others are having,” Ellermeier said. “It’s painful to be on the bleeding edge, but once we start to see the benefits on a large scale, many of these cities will follow.”

The report concludes with a piece of advice, urging smart-minded cities to forge broad partnerships as a way to share the cost burden. It points for example to Chula Vista, Calif., whose smart infrastructure partners include the study’s author, Black and Veatch, as well as Qualcomm, OSISoft and others. “There needs to be an ecosystem of partnerships,” he said. “The cities don’t want to do it alone, they want to gain the benefit of these private companies and there isn’t a single company that can do this all by themselves.”

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