Paying for smart cities

JANUARY 30, 2019 - 8:00 AM

Cities are fast becoming the single most important economic, geographic and administrative entities of today’s world. With Southeast Asia expecting a population surge of 90 million in the next decade and two-thirds of Asia living in cities by 2050, there will undoubtedly be a high level of stress exerted on existing infrastructure systems that were designed for smaller and less technologically advanced populations.

Smart cities are well-positioned to leverage technology to take advantage of the emerging opportunities to provide more citizen-centric solutions in the areas of housing, facilities, utilities management and health care.

With the recent formation of the ASEAN Smart Cities Network (ASCN), ASEAN member states have begun to develop city-specific action plans until 2025. These plans seek to achieve integrated smart cities development across the region, and increase support and financing by external partners and the private sector. 

To increase clarity in measuring smart city development, ASEAN member states have also developed and agreed on an overarching framework. To address the existing disparity in technology adoption across ASEAN member states, the framework focuses not only on smart urbanization, but also on sustainability to ensure inclusivity regardless of the level of development. 

This is an important consideration – that smart city development should be driven by the focus on four principal areas: citizens, resilience, collaboration and technology.

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Firstly, the emphasis on citizens helps focus attention on improving the lives of people and ensures that the desired benefits are delivered through relevant solutions. Secondly, technology is the key enabler to harness the power of digital as a growth catalyst, and to improve user experience by creating connections between people and machines. Thirdly, building resilience helps governments and businesses make better decisions based on long-term planning so that cities survive, adapt and thrive against the impact of stresses and shocks. Finally, effective collaboration across government, business and community is necessary for co-designed projects to be aligned, funded and value-adding. 

Collaboration is key

The importance of collaboration is apparent in the challenges faced in securing financial backing for smart city projects.

Take technology projects, for example. Technology and the ensuing data are the fuel that can enable and finance smart cities. Technology initiatives for smart cities include infrastructure, data collection, service delivery and applications. While infrastructure assets such as fibre optic and technology networks are often able to provide steady revenue, data collection, service delivery and applications are harder to monetize and may not present clear revenue streams.

In order to realize the full potential of these initiatives, and with local government resources often stretched to meet competing needs, scale can only be achieved through cross-party collaboration with the participation of the private sector to help drive these solutions.

To reduce the risk of companies' involvement in public-private partnerships, governments can provide an indication of the revenue streams over the projected lifespan of the partnership. They can approach this by sharing direct cost savings or by using a performance-based revenue model where profits are shared after achievement of specific outcomes. Certainty in policy direction or regulations such as data protection can also help to strengthen the case for private sector investment and provide more assurance for investors.

Investors need to have a good understanding of the business model, accompanied by a feasibility assessment. High-value resources along with monetization strategies should be identified so that the return on investment is fair and mutually beneficial. To that end, there should be a business case that clearly lays out the value to potential partners so that a more balanced view of risk and reward can be achieved.

Looking beyond the region

In March, Australia pledged to support ASEAN in developing cities in smart and sustainable ways across the region with an A$30m investment through the ASCN. This will be done via education, training, technical assistance and support for innovation in areas such as green infrastructure, water governance, renewable energy, innovative technologies and data analytics.

Institutional lenders such as the Asian Development Bank and World Bank are also taking an increased interest in smart city projects and are proving to be valuable collaborators. While still in the nascent stages, untapped capital via financing vehicles such as green bonds and social impact bonds can help to finance smart city projects and at the same time balance progress with environmental and social impacts.

By making payments contingent on pre-defined environmental, social and governance outcomes, stakeholders now have vested interest to finance smart city projects in a sustainable way.

In a fast-changing world, can cities be built with long-term perspective? By being deliberate in adopting the appropriate business model, the public and private sectors will achieve both financial and non-financial returns that justify investment. 

The writer is Sam Wong, EY Asean Government & Public Sector Leader. The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.