With the rapid urbanization growth, technological advancements, and sustainable development requirements, smart cities are becoming a necessity. But the major problem in the adoption of smart cities is funding and financing. Let’s understand how funding for smart cities is possible and what challenges are associated with it.
Smart City Finance and Funding
Today, half of the global population resides in cities; this percentage will only increase in the coming years, hence the need for smart cities projects. Urban development is one of the main reasons for smart cities, followed by technological advancements and the need for sustainable practices.
A city is termed a smart city when it utilizes smart technologies, the Internet of Things (IoT), and data to address urban challenges and enhance the quality of life while ensuring sustainability. The world is not moving to a smart cities transformation; however, the major problem that hinders this transformation is the need for large funding.
Based on the current practices, the finances or funding method used for the Smart cities projects are:
- Revenue sharing models: The smart city finances can be done through the revenue sharing models, where the investors can have a share in the revenue generated from the project, such as through user charges or tolls, etc.
- Government funding: The government funds and supports smart cities projects through many programs, bonds, public benefit funds, and social impact bonds. revenues and taxes for the development and providing a better quality of life to their citizens.
- Public-Private partnerships: The PPPs can be a great financial instrument for the smart cities that can make the work faster and attract investment from both the public and private sectors. These financial instruments generally follow the pay-for-performance principle, where the finance depends on the project’s success.
- Private sector investment: The smart cities can be funded through leveraging the private sector investment, loans, debt services reserves, pooled bonds, and many others.
- Innovative financing: The stakeholders can also resort to innovative financing ways for funding and build smart cities.
What’s the global approach for the smart cities funding and financing?
Nowadays, we have many smart cities in major countries; let’s understand the smart city financing with a few major countries’ approach:
- US:
- The US is focusing on making its cities smarter through digital technology and using smart tech to reduce its carbon footprint.
- For instance, Washington, DC is using smart technology to upgrade its street lighting, wifi services, and others that will make living easier.
- The US states use the federal infrastructure grants to transform into smart cities and receive support from various governmental agencies; hence, you may not find a national program for smart cities.
- Major financing is done through PPPs, municipal organizations, government funds, and private investment.
- Singapore:
- Singapore is one of the leaders of smart cities, as its government prioritizes technological development and financial sustainability.
- The major funding for the smart city comes from the revenue and government funds; however, they have other means as well, such as public-private collaboration and other development banks.
- Japan:
- Japan has a number of smart cities equipped with smart technologies, easing the lives of the people. According to reports, the country has around 227 innovative projects going on to leverage technology.
- The nation has started many smart cities initiatives, started providing subsidies, promoted research, and worked together with private companies for technological advancement.
- UAE and Middle East:
- Urbanization is growing rapidly in the UAE and the Middle East, and the smart city infrastructure is required, so the government is working on the smart nation initiative.
- The UAE has started the Smart Dubai initiative to make living more sustainable and technologically advanced.
What are the challenges associated with smart city funding?
Though the smart cities are in need, considering the current problems, there are many challenges involved in their funding that are creating problems, such as:
- High Cost: Smart cities involve smart technologies and need proper research & development, for which the project would need a high cost.
- Technology uncertainty: The smart cities depend on technologies, and people are still doubtful about fully depending on the technologies.
- Lack of sufficient infrastructure: Smart cities require proper IT infrastructure, and many countries lack in this department, which creates a problem in funding, as investors need to invest more.
- Transparency: Smart cities rely on technology, which would monitor, record, and analyze the data; hence, people are skeptical about their privacy and technology’s invasion into their lives.
- Insufficient capacity: Smart cities need proper financial support, not for the project but for maintenance as well, and proper capacity for data handling, which many countries or places lack, which can cause issues in funding.
What’s the future of smart city finance and funding?
According to current trends, it looks like the smart cities in the future will depend on blended financing, where you can expect hybrid models, consisting of PPS, green finance, and digital revenue channels, etc.
As we move towards AI and other technologies, the concerns regarding data security are another aspect of the debate. As per the global infrastructure needs, the smart cities will need reliable and efficient methods to address funding gaps and climate risks, too.
The government plays an important role in the smart cities’ infrastructure investment gaps, hence most of the financing and funding depend on the government programs.
