What comes to mind when you hear the term “smart city”? It might be a clean and safe space where people and places are connected by digital technology. Or a place where self-driving cars take us around and pollution is a thing of the past. We all have a vision of what a smart city should be – but for most of us what we imagine is far removed from the cities we actually inhabit, with clogged roads, smoggy days, and outdated infrastructure.
A new report by The Economist, supported by Invesco, explores the future of city building. Smart Cities: Investing in Future looks at how the private sector and, specifically institutional investors, can fund development in place of city governments, most of which are constrained by austerity. The key lies in fostering and supporting technologies that can truly drive change.
Tech can make cities “smarter”
According to Ani Dasgupta, global director of the World Resources Institute’s Ross Center for Sustainable Cities, there are different ways technology can be used to create smart cities. It can be used to better manage the complex systems that keep urban centres running – and technology can make it easier to use existing systems (i.e., apps that let you know when the next train is coming). There’s also governance “to make cities more responsive for citizens, to better hold people to account,” explains Gupta.
Investing needs new models
The good news is that we’re getting closer to making smart cities real. The tools and technology to make them happen are all at our fingertips. But there’s still a disconnect between the work required and the financing models investors are used to, and until that changes it’s going to be tough to create the cities we need for the future.
Private investment could play a big role, but financing models are lacking to bring that capital into cities. That has left investors looking to tech start-ups or venture capital funds instead of with opportunities to invest in traditional infrastructure. It’s an example of how the opportunities today are misaligned with most institutional mandates, says Susan Wachter, professor of financial management, real estate and finance at the Wharton School and co-director of the Penn Institute for Urban Research, University of Pennsylvania.
But financing models used for traditional infrastructure don’t work either. Cities have traditionally relied on investment structures like public-private partnerships (PPP) or municipal bonds which aren’t effective in smart city development. Unlike toll roads and bridges, smart city infrastructure doesn’t offer the same kind of revenue stream for investors and the success metrics are often very different.
Creating better financing models
Most cities are still trying to figure out a financial model that will provide the services their citizens need and generate clear returns for investors. For example, different financial instruments and models can be used at different stages of projects or varying market conditions as well as with different sets of investors. There are a growing number of urban think tanks helping cities to bridge the gap between their changing needs and investors.
Explains Wachter, “The more smart cities set up the infrastructure to get smarter, the more PPP contracts, procurement practices, etc., will be standardised. And as smart cities digitise everything, there will be more performance data to make PPP investments easier to monitor.”
For institutional investors wanting to successfully invest in smart cities, help navigating this complex and rapidly changing investment landscape is key. Clearly, the game-changing nature of this technology for cities and their citizens, and the potential for long-term, often inflation-linked, returns make smart cities worthy of investor consideration.
Read the full report here.