This section describes how digitalisation can offer cost savings and funding opportunities and details how smart city initiatives can be financed outside the city budget, including: (1) by creating new revenue streams, (2) by strengthening revenue streams, (3) through privately or donor-financed investments and operations, and (4) through cost reductions from efficiency improvements.
Incorporating smart elements into urban development allows cities to stimulate economic growth and open up funding opportunities, as city governments, residents and enterprises use information and communications technology (ICT) tools to create more local jobs and improve civic life.
Unleashing the commercial value of civic data is one way to foster economic growth. City governments can open up civic data and encourage the private companies that use them to create value-added products that could become new revenue streams. Chicago’s open data policy, for example, allows developers to create apps that improve the quality of city life. By developing new ideas and creating value-added products, a more vigorous ecosystem is formed. This positive environment leads to more innovative ideas, new business models, economic opportunities and new jobs.[i]
Digitalisation also increases city governments’ own-source revenues, such as taxes. Before Uber entered the Egyptian market, for example, local taxi drivers only accepted cash payments to evade taxes. However, as Uber became a strong competitor, local taxis started to embrace digital transactions and other online services, which brought information about drivers’ income to light. Thus, the government could levy income taxes more easily.
Another way to boost economic growth is to reinvent obsolete public services and their business models. In the case of New York City, the transformation of old payphones into public wi-fi kiosks offers valuable insights into how cities, by partnering with private companies, can upgrade existing public services and generate new sources of revenue, such as advertising.[ii]
Involving private investors has become an increasingly popular means of financing smart city projects, which often entail more innovation and technical risk. By working with private-sector partners, city governments can transfer some of the risk and draw on external technical expertise to get smart city projects off the ground. It is worth noting that bringing in private investors can involve certain trade-offs, as discussed later.
In addition to increasing economic growth, smart urban solutions help improve the operational efficiencies of city governments. Better allocation of financial resources gives city governments scope to finance more developments to create smarter and greener cities. For instance, the city government of Busan, China reduced its operational costs and energy consumption by migrating its old operating system to the cloud, where datasets were managed with a higher degree of efficiency.[iii] Other cities, such as Chicago, have also benefited from using the cloud. In Chicago, the Mayor issued an executive ordinance to create an information technology (IT) office to work in tandem with governmental agencies. The ordinance mandated agencies to publish and maintain data. On the technological front, the city government moved its computer system to the cloud, a shared storage space for computer applications and civic data, saving about US$ 400,000 annually, which it invested in other smart applications. [iv]
Resource implications and key requirements
- Expanding financing options
Most cities in developing countries possess limited financing options for smart city initiatives. On the one hand, they are often constrained by finite own-source revenues caused by loopholes in the taxation system. On the other, cities’ budgeting cycles are often tied to the political cycle, complicating the process of financing long-term projects. Private investments are often deterred by the high risks (political, macroeconomic and regulatory, for instance) that prevail in these cities.
To expand their financing options, it is recommended that cities in developing countries work with international development organisations (IDOs), such as development banks or development finance institutions, that can finance smart city projects with their own funds and mobilise private investors to pool their financial resources. Several financing mechanisms for partnerships with IDOs are discussed below:[v]
- Multilateral investment loans: IDOs can provide 5-10-year loans to boost the development of sectors such as sanitation, transport and other infrastructure.
- Multilateral risk guarantees: By providing guarantees, IDOs buffer against risks that the private sector cannot bear. This mechanism mobilises private investors, as it protects them from government default on payment obligations.
- Multilateral credit guarantees: IDOs provide credit guarantees to mitigate non-payment risk by absorbing a portion of lenders’ losses on loans to cities.
- Blended finance: IDOs and co-investors provide a combination of concessional and commercial loans to cities. Concessional loans usually enable cities to unlock larger funding amounts.
When rolling out their financial plans for smart city projects, city governments should establish whether the projects are to be profitable or non-profitable. Profitable services include transport ticketing, parking fees, utilities and the like, while certain infrastructure, such as streetlights, is not income generating.
City governments ought to allocate some of their earnings on profitable services to items such as service maintenance and upgrades. For instance, the Taipei city government allocates a percentage of its parking revenues to operations and maintenance, while the rest of the income is spent on system upgrades or bus subsidies.
Where non-profitable services are concerned, cities must devise a holistic repayment plan (for example, how the government plans to repay the funding and the terms of repayment) prior to project implementation. City governments should work with development banks or consulting firms to undertake comprehensive financial planning, including plans to repay the loans.
- Effective data knowledge management
Robust internet connectivity and cross-departmental collaboration are fundamental to effective data knowledge management. While connectivity is a prerequisite to stable data transmission, as data in smart city applications come in large volumes and various formats, cross-departmental collaboration is the first step in data monetisation.
In the past, municipal agencies have tended to work in isolation and store data in their individual systems, with the ensuing overlaps and scattered data often resulting in a waste of city budgets and energy. Cities can overcome this issue through legislative, organisational and technical reform. A common method is to migrate existing systems to the cloud, where streamlined data management facilitates the publication of data.
- Stakeholder engagement
Transparency is the foundation of stakeholder engagement. Openness of data and mind-set encourages the public, academia and businesses to express their needs and participate in governmental initiatives. Stakeholder engagement facilitated the design and led to the eventual popularity of the New York wi-fi kiosks, for example. The more popular the kiosks are, the more advertising revenues they generate, creating a win-win situation for both the public and the city.
Stakeholder engagement also plays a crucial role in data-related initiatives. Publishing data is merely the first step in achieving the ultimate goal of economic growth. City governments need to be proactive in encouraging stakeholders to use them. For instance, Chicago took a different approach to stakeholder engagement, based on need. The city government conducted a survey to understand which datasets interested the public most and opened them accordingly. The city’s data manager organised regular meetings with developers and between different communities to promote entrepreneurship and research.[vi] This created a vibrant environment in which ideas circulated, were developed and became value-added services or products.
Potential private-sector participation
Different stakeholders from the private sector should be involved in creating funding opportunities. This section discusses possible ways of involving the private sector, including: (1) the private financing of digital solutions, (2) collaboration with private app developers and (3) collaboration with academia.
City governments can establish public-private partnerships (PPPs) to secure funding and overcome the challenges of expensive initial payments. To kick-start its public wi-fi initiative, the New York municipal government collaborated with a private company, which invested US$ 200 million and enabled the creation and operation of the wi-fi kiosks.[vii] Furthermore, such partnerships allow city governments to enjoy technical expertise without overstretching internal resources. For example, Chicago outsourced the maintenance of its open data portal to a private company to avoid overspending on its IT budget.
“Where’s My School Bus” in Boston also illustrates the upside of public-private collaboration. The city leased global positioning system (GPS) data on school buses to a private company, which then created a mobile app that allowed parents to locate their child’s bus.[viii] By doing so, the city government made the most of the data without absorbing all of the costs for developing the software.
Nonetheless, when it comes to private financing or PPP-style arrangements, certain trade-offs must be considered. For example, Tbilisi’s bankcard-based e-ticketing on public transport was sponsored by a bank, which then limited the payment service to its own bank cards. Another example can be found in Belgrade, where e-ticketing and GPS-based bus monitoring were launched under a PPP with a local mobile company. The company later then monopolised the data on bus locations, only allowing people to obtain that information through its SMS service. Consequently, no apps could be developed to share this valuable “public” information.
As many city governments lack adequate resources to conduct empirical research, they should consider sharing their data with the academic sector. Opening data for research purposes may create opportunities for new apps that will have commercial success long term.
- Privacy considerations
City governments must deal with privacy concerns if they want to monetise data. For instance, surveillance cameras can capture images that contain personal information, such as facial recognition, sparking controversy. Hence, governments should bring in laws at the project planning stage to regulate the type of data that can be collected, shared, used and monetised.
Obstacles and possible solutions to implementation
When city governments come up with a business model for a new public service, they frequently overestimate its projected revenue or expect to recoup the costs in short order. In the case of the New York wi-fi kiosks, the advertising revenue fell short of the city’s expectations, possibly because installation was hampered by a lack of consensus among stakeholders. Human factors (such as conflicts of interest) should be taken into account when planning and executing a smart urban development. Hence, it is important to find common ground between stakeholders at the planning stage. Here, the steering committee plays a vital role in facilitating the process.
The lack of a holistic strategy and overlooking the importance of stakeholder engagement are other potential obstacles. The promotion of open data is a case in point. Governments may think their job is done once the datasets have been opened. Not so. In addition to involving communities, city leaders may need to incentivise municipal agencies to maintain datasets. Within the government, city leaders can adopt performance-based evaluation and provide bonuses to motivate their staff. In Chicago, each municipal agency assigned a data coordinator to manage open-data tasks. This mitigated any lack of staff commitment due to excessive workload.[ix]
[i] Sean Thornton (2013), “Open Data in Chicago: a comprehensive history”, Data-Smart City Solutions, 30 September. Available at: https://datasmart.ash.harvard.edu/news/article/open-data-in-chicago-a-comprehensive-history-311.
[ii] T. McCarthy (2014), “New York City Seriously Wants to Turn Pay Phones into WiFi Hotspots”, Huffpost, 5 August. Available at: https://www.huffpost.com/entry/nyc-payphone-free-wi-fi_n_5291054.
[iii] Cisco IBSG (2011), Smart+Connected City Services Cloud-Based Services Infrastructure Enables Transformation of Busan Metropolitan City, San José, CA. Available at: https://www.cisco.com/c/dam/en_us/about/ac79/docs/ps/Busan-Green-u-City_IBSG.pdf.
[iv] Sean Thornton (2013), “A Profile of Technology and Innovation in Chicago”, Data-Smart City Solutions, 11 April. Available at: https://datasmart.ash.harvard.edu/news/article/a-profile-of-technology-and-innovation-in-chicago-190.
[v] Deloitte (2018), “Smart Cities Funding and Financing in Developing Economies – Assisting developing cities to finance their infrastructure gap through private sector participation approaches”, New York. Available at: https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Public-Sector/gx-smart-cities-economies.pdf.
[vii] C. Robbins (2012), “Brace for the "Fastest Internet You've Ever Used" At These Free Sidewalk Kiosks”, Gothamist, 5 January. Available at: https://web.archive.org/web/20161001055640/http://gothamist.com/2016/01/05/linknyc_wifi_2_fast_2_furious.php.
[viii] City of Boston (2017), “Where’s My School Bus?” Boston, MA. Available at: https://www.boston.gov/education/wheres-my-school-bus.
[ix] National League of Cities (2014), “City Open Data Policies”, Philadelphia, PA. Available at: https://www.nlc.org/wp-content/uploads/2016/12/CSAR-Open-Data-Report-FINAL.pdf.