Smart cities: Investing in the future

• Cities need private investment to realise their smart city goals.
• Given the nature of smart city projects and their payback periods, traditional infrastructure financing models may not work well.
• Barriers to smart city creation and success will vary by market type; corruption may be an obstacle in emerging markets, whereas privacy may pose more of a problem in developed markets.
• The return on investment and the definition of success may differ based on perspective: societal v financial.

The term “smart cities” conjures visions of a future where digital technology monitors and connects everything from buildings to street lights to self-driving cars. It allows governments to provide better city services more efficiently, creating a more accessible, safer, cleaner and greener environment in the process. The city’s citizens are able to better utilise all the city has to offer, from the convenience of their smartphones. Most cities today are far from that vision but many are working towards it, both investing in smart infrastructure and creating ecosystems that allow urban innovation to flourish.

However, many cities, constrained by austerity, must look to the private sector to fund this development. Institutional investors, seeking yield and looking to meet their long-term liabilities, have long been touted as the ideal sources of funding for infrastructure, whether smart or not. So why isn’t that much-needed flood of investment happening?

This report will examine the investment landscape for smart cities, and investigate the related opportunities and risks for investors.

Ways of investing in smart cities

• The majority of private investment so far has been concentrated in the transport and mobility sectors.
• This investment is usually directly in tech start-ups or through venture capital funds.
• Cities can influence the pace and type of smart development by creating an environment—through regulation, subsidies, etc—that supports private-sector development.

There are three main ways technologies can be used to make cities smart, according to Ani Dasgupta, global director of the World Resources Institute’s Ross Center for Sustainable Cities. “One is simply to manage cities that have complex systems better. Ten years back when IBM started talking about smart cities, that’s what they meant because they were trying to figure out how technology could solve the management of cities,” he says. “The second is to provide new services that it wasn’t possible to provide without the technology, like the Ubers or smart bikes of the world, or making existing services better, like using your mobile app to know when the train is coming. And the third is to actually make governance better, to make cities more responsive for citizens, to better hold people to account.”