Rushlight Events

5 June 2014

Sustainable Construction in Smart Cities

Financing future city construction

Ed Cooke, Partner, Bird & Bird LLP

  • Availability of funding for smart city developments depends significantly on the scale and type of the project envisaged.

Single component projects

  • There is a mix of public and private funding solutions, tariffs, tax breaks, etcavailable for specific projects which might comprise a component of a smart city development (e.g. the retrofit of a building, renewable energy generation, fibre installation). The programmes seem to be under constant review though.

Large scale Smart City developments

  • The real benefits of technical innovation will only be realised when funding is available to deploy it in large-scale integrated City-wide projects.
  • In the context of these large projects, financing is truly an evolving area.
  • Only a couple of years ago, the majority of Smart City initiatives in Europe were financed solely by research funding – either by public funded research grants or by technology companies.
  • The position has moved on somewhat now, and continues to do so although perhaps not at the pace we would like.
  • Currently, we are in a place where "applied research" is being funded. Investment is available for innovative solutions which have been tested in research lab, in order to deploy them into the market.
  • We also have great examples such as the Future City Glasgow demonstrator
  • There will be a number of projects in this sector funded through the EU's Horizon 2020 programme

Public sector funding

  • The challenge is to keep the funding tap on to support multiple projects.
  • Many cities have developed fantastic plans for becoming "smart" but have not yet really worked out how these grand transitionsto will be funded. For example, Birmingham and London both published plans last year, but neither have fully worked out the funding.
  • Those plans will only come to fruition if a multi-layered approach is taken to funding them.
  • Large scale developments will inevitably involve a mix of public and private sector funding.
  • The Localism Act opened up to local authorities thepossibility of developing novel public funding packages.
  • Some of the public funding models under consideration have crossed over from the US. In particular municipal bonds backed by tax revenues, project revenue or realised savings. And tax increment financing and New Development Deals.
  • But public sector budgets are constrained, and we know there are significant difficulties in raising tax revenues, in the UK and more widely in Europe.
  • Public sector unlikely to provide the sole answer.

Private sector funding

  • Banks and pension funds have expressed a willingnessto create funding instruments for large-scale redevelopment of Smart Cities.
  • There isa realisation in the private sector that consistent revenue producing investments can provide sustainable income for the long-term. This type of thinking lends itself ideally to Smart City projects where high capital expenditure is amortised over lengthy period and the project generates income. A PPP/PFI approach.
  • But there are some key difficulties for the private sector, which we need to help them with:
  • How does the private sector gain sufficient understanding of the technology and the public benefits in order to make a decision to invest large sums of money?
  • How do they know they are not investing in technology which will quickly become outdated or surpassed?
  • How do they calculate what the real returns might be, and what their exposure to market fluctuations might be? We are starting to develop costand revenue models.
  • Is it possible to forecast energy prices and be insulated from the impact they might have on realised savings for some projects?
  • And who does the private sector turn to if it all goes wrong? To date, most projects have a public sector entity as the lender of last resort. Public body guaranteeing their exposure. Will that continue?