Create the best individual version of your city
Numerous financial instruments are available to local governments to fund there projects, here is a brief overview of the possibilities
- Petr Suska
Examples: Green Bonds, Social Impact Bonds, Energy Efficiency Loans
Cities maintain capital funds separate funds from their operating funds. The most common tools used to pay for these kinds of capital costs are government-issued bonds. There are many examples of these, such as green bonds issue in Gothenburg, Sweden to make earmarked investments into low-CO2 projects.
Examples: Tap Fees, Linkage Fees, Impact Fees
Government-based financing tools are the most commonly used for the funding of unproven smart technologies with high risks. Another set of financing tools, development exactions, highlight the regulatory power of governments to force developers to pay for the infrastructure services that their developments will access. For example, Philadelphia, USA, levies impact fees to fund a storm-water capture program (the city assesses property fees on the ratio of the property’s impervious surface area that prevents water absorption). Likewise, the city of Freiburg, Germany, requires investors to fund local social infrastructure like child-care and
Examples: Traditional PPP, Pay for Performance, Securitization and Structured Finance
The most common PPP in the area of smart cities are Energy Service Contracts (ESCOs). Here the public authority contracts a service company to invest, install and operate an efficient smart city solution–offering greater cost saving than the existing infrastructure.
Examples: Loan Loss Reserve Fund (LRF), Loan Guarantees, On-Bill Financing, Pool Bond Financing, Value Capture, Tax Increment Financing
Pool Bond Financing suggests a creation of a legal entity, which is owned by a private and public actors (Development Banks, Association of Cities and Communities, Ministries, etc.). This entity can borrow funds at a lower interest rate and lend to local banks to distribute funds to particular projects.
Value Capture – betterment levies are a form of tax or a fee levied on land that has gained in value because of public infrastructure investments. Whilst impact fees and developer exactions work from the cost side of budgets, betterment levies try to capture part of the infrastructure investment already incurred by the government. At one point, the UK imposed a betterment tax equivalent to 40 percent of the land-value gains to be channelled in to public infrastructure investment.
Examples: Crowdsourcing, Micro Lending, Venture Capital, philanthropic funding
Large parts of the development and piloting of smart city solutions has been driven by start-ups and SME’s. This model is typical for an immature and fragmented market and since it is a bet on the future the importance will reduce when market fragmentation is reduced.
Example for an alternative funding scheme: DesafiosPorto
Other alternative funding schemes e.g. citizen-investments, IT-based cooperative development funds etc., offer a more future-proof alternative for local investments. Citizens, philanthropists and local companies directly benefit from local smart city investments, not only financially but also in other ways.
The city of Wiesloch in Southern Germany, for example, has sold its street lighting to a local citizens co-operative who privately invested into their city’s infrastructure. The city leases the street-lights back from the co-operative on a fixed annual rate and the co-operative contracts a tech company and an operator to provide high-quality, low energy street lighting. Through this, local money helps reduce public spending and increase public services as well as liveability and security in the city.