Smart Cities Technology Is Appealing, But How Will It Get Financed?

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Local governments already have challenges with funding their existing infrastructure, raising questions on how to make investments in smart technologies a reality.

WASHINGTON — As interest grows in flashy new “smart cities” technology such as self-driving vehicles, roadway sensors and data analytics, many local governments are finding it tough just to meet the demands of paying for traditional infrastructure—like streets and bridges.

A recent survey of local governments by the International City / County Management Association found that 39 percent of respondents say they’d need more money to sustain infrastructure at a baseline level and that the current state of their infrastructure is hurting quality of life.

Joshua Franzel, director of policy research for ICMA, described the survey results during an event here Thursday.

So a question arises: How will local governments around the U.S. foot the bill for infrastructure basics, while also coming up with money for more advanced investments, ones that could usher in improvements in areas like road safety and energy efficiency?

Franzel was among a group of panelists that offered some insight into this question and other related issues on Thursday. The panel discussion was held as part of Smart Cities Week.

“Building infrastructure is a challenge,” said panelist Enoh Ebong, deputy director and chief operating officer of the U.S. Trade and Development Agency. “I think that mobilizing the financing for building infrastructure, and I would add smart infrastructure, is even harder.”

A common option U.S. local governments use to finance infrastructure projects is borrowing in the form of tax-exempt municipal bonds.

Franzel pointed out that, in some cases, there are communities that could borrow for infrastructure investments. But the appetite to take on debt is weak among voters and elected officials.

“They don’t necessarily always have the confidence,” he said of those communities.

Public–private partnerships, or P3s, are another financing option. But, for a P3 to work, it requires a private-sector partner that is confident they can get a healthy return on investment, or ROI.

Stephane Goyette, director of the Smart and Digital City Office for the City of Montreal, noted Thursday that ROI can clash at times with what he calls “ROC,” or return on community. “That sometimes is in conflict with what the private sector may have as an objective,” he said.

Other considerations emerge with P3s as well. Smaller jurisdictions sometimes don’t have the expertise to broker deals with sophisticated private investors. And, with fast-changing smart cities technology, officials might fear getting locked into a contract where their locality gets stuck with systems that quickly become outdated.

Franzel highlighted another trend that has to do with pension funds and U.S. sovereign wealth funds.

Examples of U.S. sovereign wealth funds include Alaska’s Permanent Fund, or the Permanent Wyoming Mineral Trust Fund. Both of these are supported with state revenues collected from extractive natural resource industries, like the oil, gas and coal sectors.

Pension funds and sovereign wealth funds tend to have sizable portfolios they look to invest.

“You’re seeing an increased interest in how these funds can potentially invest in infrastructure,” Franzel said. But, he added, this trend was for now limited and “we’re not seeing a sea change.”

Regional cooperation was another topic that surfaced during Thursday’s discussion.

Pam O'Connor, a Santa Monica, California councilwoman, noted that in her county there are 88 cities. When it comes to costs tied to earthquake preparedness and seismic retrofitting, she said, “If each one of us is doing it alone . . . who knows how that can happen.”

“I think that’s going to be the model going forward,” she said of regional collaboration.

Despite community pride and the allure of local control, O'Connor added: “It really is the wave of the future, that coordination.”

Bill Lucia is a Reporter for Government Executive’s Route Fifty and is based in Washington, D.C.

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