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Funding the $1,5tn smart city opportunity

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Funding the $1,5tn smart city opportunity

The capital-intensive task of transforming cities into seamless ecosystems is prompting governments to explore revenue sources beyond internal bodies and join hands with financial intermediaries and private investors.
With the rising connectedness of things and people, the global smart city market could expand to $1,5-trillion by 2020 and prove to be one of the biggest investment avenues for private investors and institutions.
The public sector will also look to new mechanisms to distribute their funds into various smart city projects and, ultimately, earn revenue through those projects.
“Stakeholders will be able to choose from a multitude of financing mechanisms, and each financial mechanism has a unique selling point in terms of infrastructure funding,” says Frost & Sullivan Visionary Innovation research analyst Yash Mukherjee. “Project initiators will need to analyse the best-fit mechanism based on risk appetite, size of investment, duration of financing and tax implications. They will also benefit greatly from collaborating with financial intermediaries, as they securitise the cost of capital and distribute risks among investors.”
Smart Cities Funding Models is part of Frost & Sullivan’s Visionary Innovation (Mega Trends) Growth Partnership Subscription. The study analyses and profiles each financing mechanism to understand the key aspects of smart city projects.
The creation of smart cities will have wide implications for all industries offering public and private services. For instance, smart cities will disrupt public utilities segments such as energy, transportation, waste management and water distribution.
Private participants in industries such as ICT will fuel this disruption by integrating their services and providing hardware to change the way citizens live.
“In developing countries, stakeholders in smart city development often resort to direct financing through government allocation or international grants,” says Mukherjee. “However, international grants and financing are dependent on political and economic stability.
“To attract foreign funding, which often is complemented by transfer of technology and expertise, local governments must focus on their ease-of-doing-business indicators.”
Meanwhile, participants in developed economies rely more on revenue-based financing models to build infrastructure.
Stakeholders from both types of economies have found great value in adopting the public and private partnership model, even though the terms of agreement may vary according to the region.