The global smart city market could expand to US$1.5 trillion by 2020, due to the rising connectedness of things and people, and prove to be one of the biggest investment avenues for private investors and institutions.
The finding comes from a new report by Frost & Sullivan, a business consulting firm. According to the study, Smart City Funding Models, cities themselves will also look to new mechanisms to distribute their funds into various smart city projects, and ultimately earn revenue through those projects.
“Project initiators will need to analyse the best-fit mechanism based on risk appetite, size of investment, duration of financing and tax implications,” said Yash Mukherjee, Research Analyst, Frost & Sullivan. “They will also benefit greatly from collaborating with financial intermediaries, as they securitise the cost of capital and distribute risks among investors.”
Mukherjee told Cities Today that revenue based funding is yet to take off as a large contributor to financing projects.
“This could be due to the fact that most projects during their initial phase are capital intensive and the gestation period on revenue based funding models usually don’t meet the financing schedules planned by project administrators.”
He added that governments and private entities involved in building infrastructure to be used to support the next smart cities will not depend on a single funding model.
While the list of cities studied is not exhaustive, Mukherjee said that cities in developing countries must focus on their ease-of-doing-business indicators to attract foreign funding. At the same time this would reduce their reliance on direct financing through government allocation or international grants, which are dependent on economic and political stability.
The study looks at financing of smart cities from the perspectives of both cities and investors with a focus on the financing options available to cities as well as the risks associated with various funding models investors may be buying in to.