Siemens report on SmartStart investments says private sector could provide funds for projects with clear returns on investment
Funding provides a challenge for authorities wanting to invest in the technology and expertise for smart place projects: it is often possible to point to a return on investment (RoI), but with a delayed payback that makes it difficult to justify the spending against more pressing demands. The UK is not the only country where local government is too strapped for cash to spend for the long term.
Understandably, technology giants with a stake in the movement are also concerned with the dilemma. German engineering company Siemens, which has an infrastructure and cities division and its own financial services operation, has gone public with the case for an increased role for private sector finance.
The company has published a white paper on the subject, SmartStart: modelling private sector finance adoption for SmartStart cities, which outlines some of the factors and opportunities.
It takes a global perspective, looking at 13 countries in all, and estimates that the UK could find up to €6.2 billion from such sources, excluding the potential of London as a capital city.
At the core of its argument is that private financiers can be more open to supporting the elements of smart places with a clear RoI, and that cities should be looking to tap into asset finance arrangements as they become more widely available.
Nine early stage smart initiatives are identified as having a track record for dependable RoIs: building controls for energy efficiency; medical technology; citizen self-service online; vehicle routing; parking systems; road pricing; mobile workforce enablement; e-buses and e-vehicles; and low energy street lighting.
There are two main alternatives for private sector financing. It can work on a project-by-project basis, often extending over a matter of decades, for initiatives with a proven RoI. This is akin to public-private partnerships that tend to be large, complex, involve a consortium of financiers and fix the rate of return for the length of the project.
The other – more short term and agile – is the use of asset finance, frequently used by businesses to obtain equipment for growth.
In the smart places context it would apply to projects such as a smart routing system or an energy-efficient building, which require smaller investments and can show a well-proven RoI. The projects can stretch from a few months to a few years, and generate savings that are often realised in relatively quick time.
Some are sufficiently attractive to create competition among financiers that leads to highly affordable rates of interest. Siemens claims – inevitably from its perspective – that financiers that understand technology are best placed to offer the right type of packages.
Some can flex to ensure that savings from the technology investment accrue at the same rate as monthly payments; or take into account the residual value of the technology, which affects the monthly charges.
It contrasts with the large scale projects, which are subject to a complex set of variables that make it much more difficult to forecast the RoI. Private sector finance will often have a role in these, but the public sector provides the cornerstone in providing a major slice of the capital and accepting a big share of the risk.
Adapting the asset finance model for smart places is a relatively recent development, but one that is available from an increasing number of providers. Chris Wilkinson, head of sales for public sector Siemens Financial Services, says there is now sufficient availability to make it a viable option for many authorities.
“Cities around the world are increasingly engaging in smart development to improve efficiency of local services, enhance sustainability, improve the lives of their citizens, and develop their competitiveness,” he says.
“Private sector asset finance allows cities to make the full range of SmartStart technology investments in a timely manner. By diversifying their sources of funding for smart investments, cities can benefit from the resulting savings and improvements to citizens’ services without any delay.”
It all points towards a piecemeal approach to the development of smart places, which may not match the grand visions of planners but is probably more realistic for most of local government. It also entails that there will be times when the finance is relatively easy to find, and others when a tight market could place projects on hold.
The resulting challenge would be to ensure that the various elements of the smart place amount to a coherent whole rather than a mish mash of projects that do not align with each other. This will depend on technical interoperability, but also on strategies that find the right balance in allowing for flexibility of the financing.
It is new ground for public authorities worldwide, but provides opportunities for places that use technology to work better.
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