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How can municipalities manage funding for smart city projects?

Lorenzo Gonzales.jpegBy Lorenzo Gonzales
Strategist and Distinguished Technologist, HPE


When it comes to planning smart city initiatives, municipal governments have a funding problem.

It’s not just that high-tech municipal services can cost a lot, and there never seems to be enough money available. Rather, the problem relates to the nature of municipal procurement, and the fundamental conflict with the innovation that such projects demand.

Smart city procurement problems

Cities have two parts. One is the physical metropolis, a combination of spaces and functions where we live and interact, as individuals and businesses. The other is the city administration, a combination of vertical silos that usually work independently to cover well-defined, specific services.

Because of the siloed nature of municipal governments, purchases are usually made according to vertical needs. In other words, departments have to justify the exact requirements and costs for their own projects, and no more. That is what we expect from a transparent administration!

But smart city initiatives are different. The digital layer required for smart projects should be regarded as an infrastructure that connects other smart city services, not just dedicated to a single vertical. This is unique among municipal infrastructure layers, such as water or power.

For instance, a CCTV system could have dozens of potential use cases, including public safety, traffic control, and future services that haven’t even been devised yet. However, the city department that procures the CCTV system only justifies why the cameras are needed for its own needs. Budgets are set accordingly.

In other words, procurement cycles are designed for a single department. They don’t have the flexibility to include the needs of other departments. In the years I have worked with municipal officials on innovative projects, I have yet to encounter a smart and repeatable way for setting rules to make digital infrastructure a shared asset. For many local governments, it’s simply not possible according to current procurement rules.

Smart city technology evolving too fast?

There’s another point to be made about smart services, that relates to the pace of change. It turns out that smart city technologies are evolving much faster than the city itself, adding an additional layer of complexity.

Consider the humble traffic light. These vital systems for controlling traffic flow and providing a safe way for pedestrians to cross the street may be updated just once every 30 years.

However, during that time the technology related to traffic management – including lights, vehicles, roads, and the technologies carried by pedestrians themselves – will make huge advances: Applying Moore’s law, the performance of things around our traffic lights will become one million times faster in 30 years! What seems bright and shiny now in the world of traffic management may be regarded as obsolete in a few years.

For instance, new traffic hardware installed in 2010 included features that were state-of-the-art for the time – LED lights that consumed 30% less electricity and crosswalk safety features for pedestrians with low vision. Those features seem positively quaint now, considering newer adaptive traffic lights come equipped with cameras, sensors, and wireless connectivity that can recognize backups across multiple intersections and modify traffic flows accordingly.

In addition, municipalities planning a smart city project will likely lack clarity on what they are trying to achieve because they don’t have real data to work with and may not have a mandate or funding to make adjustments after the launch. Again, this points to a lack of flexibility in the way municipal procurement works.  

Addressing the smart city funding gap

But the situation is not hopeless. The global smart city market now enjoys double-digit growth, and is expected to exceed $2.5 trillion by 2025. According to a recent Gartner report, government political and technology leaders can turn to a number of funding strategies to support smart city projects. They include:

  • Leveraging capital from cost optimization efforts, innovation investments, infrastructure funds, and unused grants.
  • Working with private companies and NGOs to deliver smart services.

When I talk with local government officials about smart cities, I hear a lot of interest in public-private partnerships. There are definitely ways to make them work, but they are often subject to regulations and other complexities. For instance, to modify delivery of a service like electricity, there are technological standards to take into consideration, not to mention regional, national, or even international regulations or rules that must be followed.

Sometimes workarounds are possible. In India, the federal government is driving the creation of command and control centers at the local level. Directed by India’s Ministry of Urban Development, the central government provides initial funding to qualified cities. Bonds, local taxes, monetization of services, and public-private partnerships play a role at later stages.

It’s important to note that public-private partnerships tend to be driven by political decision-makers, as opposed to IT. That’s not necessarily a hindrance, as political leaders can often push past obstacles and get stakeholders working together.

Three best practices for working with private partners on smart city projects

I advise officials and IT leaders to apply the following best practices when working with private partners:

  1. Build out a top-down vision of what the city is going to do. There are benefits that go beyond identifying potential smart services. They include everything from managing expectations amongst stakeholders, to building a leadership team within the municipal organization to carry the process forward. As the Gartner report on smart city funding notes, team members “must develop skills to understand how public-private partnerships work, legalities within their jurisdiction, risk management capabilities, and what would be acceptable benefits and risks for their organization.”
  2. For those projects that are managed by a technology group within the municipal government, IT leaders need to develop a midterm view. This not only requires thinking about how the technology is going to evolve, but also what partners will need to be brought on board. Even before the launch, IT leaders need to be thinking about how the city will keep smart city initiatives optimized and interconnected five or ten years later. Asking these types of questions will help plan deployments and identify potential partners, while letting municipal IT leaders maintain operational control.
  3. Seek out partners whose strengths lie in two key areas: services and technology. Sometimes a single partner can cover both areas. For many of its clients, HPE functions both as a technology partner as well as providing services expertise. In other cases, different partners will be involved.

The service-oriented partner will help devise and realize the service, which may be focused on a specific area (for instance, recycling or tourism services) or may even have expertise in some emerging business model, such as ride-sharing.

The technology partner must be chosen carefully. It is relatively easy to design smart services using current technologies, or the previous generation of technology. It may even save money in the short term. While this may be a tempting shortcut, it comes with a huge risk in that such technologies are not planned in a way that they can evolve. It’s even possible to design a system that is obsolete before it launches!

Smart cities: proprietary vs. open standards

When proprietary technologies designed for specific vertical needs are purchased, the risk is even greater. They can’t be extended to other use cases, and the pace of development of the proprietary technology may not keep pace with the digital revolution taking place in the wider world. Once such a system is embedded in the urban landscape, it is very difficult to remove. You can’t just swap out street lights or parking meters without incurring enormous costs.

Designing for the future is something that we at HPE take great pride in. For an innovation ecosystem to thrive, we believe open standards for technology, communication, and technology architectures are crucial. In the long term, standards-based systems offer a huge advantage because there is more competition, more providers, and a broader array of possibilities. The cost of evolution and innovation will be far lower than for a proprietary system, which may only survive and evolve according to the limited needs a very specific use case.

A city is a complicated thing. It is not like an SMB, a large enterprise, or even a huge enterprise. Instead, it is more like a combination of entities of different sizes focused on specific domains that may have little or no overlap. Digital-enabled transformation is possible, but it requires an innovation ecosystem that encompasses multiple services and is capable of evolving. It’s not easy to manage and there will be funding challenges, but with visionary leadership and the right partners in place, real progress can be made.

Download a copy of the Gartner report: Smart City Funding Models: It’s Time to Be Creative.

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