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Balancing Finance Options for Smart City Initiatives

Smart city financing involves the use of many financial tools in order to secure capital funds for improvements. Capital improvements include upgrading existing infrastructure as well as implementing new smart cities technologies. Equity financing for new initiatives can come from a budget surplus, direct grants, or subsidies from higher level governments. Debt financing includes public sector vehicles such as various types of bonds and loans, as well as private financing options including public-private partnerships (P3) and privatization. Additionally, cities can secure alternative capital funding based on real property assets which is not considered equity or debt financing.

“City leaders create a capital stack with funding from a variety of sources in order to find the right balance for fiscal responsibility,” says Jeff Mulrennan, Senior Vice President at Landmark Dividend. “The financing instrument that a city uses depends on a number of factors: the type of capital improvement, the life expectancy of the initiative, the financial health of the city, and the risk level of the project. Each of these factors will impact a city’s ability to secure certain types of funding.”

Examples of Financing Tools for Smart Cities

Equity Financing: Smart City Grants, Subsidies, User Fees

Municipalities can tap governments above them including city, state, and national governments for financial support. Cities are typically resource-constrained and benefit from support of higher level governments to help improve inadequate and outdated infrastructures as well as implement new smart technologies. Equity financing, if appropriate, is often the first source of smart city funding for smart city initiatives.

Example: Transportation Grant

The US Department of Transportation will award one city with $40 million to help them implement smart transportation initiatives such as smart sensors in the transportation networks and self-driving vehicles. Columbus is one of the seven finalists for the DOT’s Smart City grant and plans to use advanced technologies to reduce congestion and improve the environmental effects of travel. In addition to the possible federal grant, Vulcan Inc. plans to award $10 million more to look at electric vehicles. To give the city even more of an edge in the contest, the Columbus Partnership announced $90 million in commitments toward the cause from local investors.

Example: User Fees

The benefits of user fees are obvious; the more fees that municipalities collect, the more enhancements that can be made to city infrastructure tied to those user fees. Bike sharing systems, smart parking, and bus rapid transit (BRT) are examples of smart city initiatives that can utilize user fees to help pay for the service. The goal is that these systems will ideally be self-sustaining over the long-term, either from the growing base of income from rental/user fees or from advertising revenue at the system or station level.

Real Property Financing:

Landmark Dividend provides an alternative option for financing the real property portion of smart cities projects. These arrangements can convert some of the project costs out of capital into operational expenses. The financing instrument can be held by the city, the developer, or the utility, and can be implemented without debt covenants and many other typical lender restrictions. “Landmark Divided real property arrangements include the added benefit of flexible durations which can range from 10 to 99 years. The risk to borrowers is considered low and this form of financing is considered flexible and easy compared to many of the other financing options,” said Mr. Mulrennan.

Example: Real Property Based Financing

Real property assets can be monetized in exchange for working capital which can be reapplied to existing or new infrastructure projects. “If your city is expanding their broadband infrastructure, that groundwork is an asset that can be leveraged for capital. Physical structures like data centers, wireless cell towers, mini-towers, wind and solar structures, digital kiosks, EV charging stations, traffic control systems, and even automated sprinkler systems are other types of assets that are easily monetized.”

Debt Financing: Government Bonds and Loans

Bonds can be issued by entities that have the authority to generate tax income to repay the debt. Cities, counties, districts, and publicly owned airports can all issue bonds for capital improvements. In many cases, if a general obligation bond is used, voter approval is required. “There are a large variety of bond options,” said Mr. Mulrennan. “If the bond issuer is fiscally healthy, or the project has an obvious ROI, then bonds are a relatively easy way to secure capital for investment.” But bonds take time and have a costs associated with them and the ability of the issuer to keep “going to the well” may be limited.

Example: Revenue Bonds

The SmartCities Financing Guide provides the following example: An original plan in Cincinnati to upgrade the city’s parking meters and build a downtown parking garage involved up to $30 million in revenue bonds issued by the Port of Greater Cincinnati Development Authority. Under the proposal, the smart meters would be installed on existing poles and accessible remotely by smartphone users. The improvements were expected to generate $6.3 million in revenue the first year and $7.6 million by the third year. A contentious issue in Cincinnati, the city council eventually approved a less ambitious smart parking initiative.

Debt Financing: Public-Private Partnerships

Cities that are fiscally constrained or dealing with too much public debt can look to the private sector for city funding. With a public-private partnership, city leaders coordinate with technology and service providers who will share the project responsibility in return for future gains on the investment. The government continues to own the infrastructure assets but the private partners manage the service delivery. The government may prefer to sell the infrastructure asset to the private sector in whole or in part through privatization. “This type of financing may have a higher cost of capital but the municipality benefits from the experience of the service and technology providers,” said Mr. Mulrennan.

Example: Public-private partnerships

Kansas City is in collaboration with Cisco, Sprint and Think Big Partners to develop a leading technology, innovation and entrepreneurial community. The private partners construct, own and manage the intelligent Wi-Fi network which connects to a broad range of smart city applications. The program includes a free outdoor public Wi-Fi deployment across more than 50 square blocks downtown, 125 “smart” streetlights along a two-mile stretch of the new KC Streetcar line and 25 interactive kiosks to engage citizens.

San Jose, California, installed integrated LTE wireless in LED street lights via its SmartPole program in partnership with Philips and LM Ericsson.

ShotSpotter partnered with GE in more than 90 cities to embed its sensors in streetlights to help triangulate and pinpoint gunshots by using embedded surveillance technology.

Landmark Dividend provides financing through private investment and the leasing of real property assets. Our leasing options can provide equally long terms which can create significant cash flow benefits for cities. For example, when buying a home, most people don’t take out a 10-year loan because the monthly payment becomes unmanageable; yet, with a 30-year term, owning a home becomes more affordable. For more information about Smart Cities financing solutions from Landmark Dividend, click here to provide your information and we will contact you as soon as possible.