How Can Smart Cities Overcome Their Funding Challenge?

On all fronts, cities are adopting new technologies and gradually becoming more connected. Innovative digital projects are multiplying, with cities using data and technologies such as cloud, mobile, Internet of Things, AI, and biometrics to improve the quality of urban life. Cities are also relying more on smart solutions to achieve their social, economic, and environmental goals, in line with the UN’s Sustainable Development Goals (SDGs), which many cities around the world have incorporated into their urban planning. But cities need resources to fund these projects, and financing constraints are among the main obstacles to their initiatives cited by city leaders.

The challenges to fund smart city initiatives and similar projects to achieve the SDGs can be explained by many factors. Such urban projects often deploy certain new technologies for the first time, which can decrease investor confidence. In addition, some projects are difficult to monetize and have uncertain ROIs; while they may offer great socioeconomic advantages, it is  difficult to quantify the full benefits they will provide.

A report from Deloitte shows why it’s so important for cities to develop a detailed plan for their smart projects, in part to show potential partners or other actors why these initiatives are worth investing in.

“The plan should include a robust business model; a creative approach to funding and financing sources (finding new sources of revenue for projects and new business models for recovery and value capture); and innovative financing structures for investors,” details the report.

According to ESI ThoughtLab’s Smart City Solutions for a Riskier World study, 63% of the 167 cities surveyed globally do create an implementation plan, a critical starting point before deciding which projects to undertake. Fifty-six percent also calculate the project’s ROI.

A city leader in Bogota, Colombia, underscored the importance of such a plan: “Bogota has followed a very structured path. We have a national roadmap that leads the planning of all initiatives related to smart cities. The roadmap starts with a self-diagnosis that details the current capacities of the city, followed by a projection of what we can reach,” said Grace Quintana, the city government’s leader for digital transformation.

ESI ThoughtLab’s study shows that given the large financing needs, cities will be changing the way they pay for their programs in the next three years. Today, cities rely most on private-sector financing, government-based borrowing, public funding from national and state government, and funding through user fees and taxes. Over the next three years, these mechanisms will become less important. Instead, cities expect to draw more heavily on philanthropic support (up by 34 percentage points), vendor financing (up by 26), crowdfunding (up by 22), and multilateral and development funding (up by 18).

Main Funding Techniques to Support SDGs

Even so, the challenge will remain huge. According to the UN’s  Roadmap for Financing the 2030 Agenda for Sustainable Development, the financing gap to achieve the SDGs in the emerging markets alone is estimated to be $2.5 to $3.0 trillion per year. Given their central role in achieving the SDGs, cities will bear a large portion of the funding burden. This underscores even more how important it will be for city leaders to find new sources of financing and diversify their funding partners.

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Laura Garcell Nimylowycz is the Editorial Assistant at ESI Thoughtlab, where she supports the editorial team with project management, research, and editing. Ms. Garcell Nimylowycz attended Columbia University as a Kluge scholar and received her Bachelor of Arts in Political Science and History in 2019. While at Columbia College, she was a staff writer for the university newspaper the Columbia Daily Spectator, as well as an editor for the Columbia Journal of Politics and Society.

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