Graham Colclough (Graham leads Business Models & Finance in the Sharing Cities consortium, and is on the Ruggedised and Atelier Advisory Boards within the 17 EU funded smart city programmes (SCC01). As part of his work in this community he also leads the Business Model and Finance Task Group. Furthermore, he chairs the Integrated Infrastructures and Processes Action Cluster of the Marketplace of the European Innovation Partnership on Smart Cities and Communities).
There is a clear gap in the market in terms of funding the smart city projects that offer us the potential to transform our cities. Public funds are limited, and many market investors still see cities as ‘too small, too slow, and too risky’. So how can we bring projects to the table which are truly ‘bankable’ – be that from public funds (i.e. our taxes), or commercial investors (i.e. our savings)?!
The European Innovation Partnership for Smart Cities & Communities (EIP-SCC) “Towards a Joint Investment Programme for European Smart Cities” paper highlighted the need to bring (indeed ‘blend’) a variety of new funds to the table to speed the wide-scale adoption of potentially game-changing smart city solutions. With a now-recognised climate emergency; stated target dates for the likes of electric mobility transition and carbon-neutral cities that are being set closer and closer, it puts that much more emphasis on the need for funds to be available to pay for all the resulting improvement works. And with recent high-profile legal challenges that makes it very clear that sustainability is starting to mainstream (e.g. the recent Heathrow 3rd runway case), investment decision making is now becoming that much more challenging.
Where will that money come from, and how can we help liberate it?
The public purse in most places has a limited depth. Yet there is plenty of money in the market. And many of the smart solutions have quite compelling business cases (not always well captured alas).
At least two things are needed:
- Firstly, the engagement of a whole host of new investor types.
- Secondly, the ability of cities to put projects together that will attract funds and deliver the outcomes that are desired.
Alas all too often public value outcomes, which are important to cities and society, and to a growing pool of impact investors, are less exciting for financially oriented investors. So (as the Towards paper makes clear) all parties will need to change: how they think, what they do, and how they do it; in order to help put together projects that will attract funds and deliver the outcomes that are desired. Indeed, the paper suggests 5 conditions by which the market can be improved to stimulate scale adoption.
Considering investor types – and there are many – we must figure out how to unlock senior funds to scale solutions fast: institutional, public, pension funds, international commercial, and the like. Organisations that often seek triple digit million project tickets; though recognising that smaller sums can help unlock the market and securitise larger investments. Individual cities struggle to do that, where aggregation of demand could make such volumes entirely feasible. Of course, that requires collaboration, and common solutions. However, that shouldn’t be seen to be a ‘bridge too far’, given that we agree we do have a rather large hill to climb to deliver the 2030 Agenda.
So how can cities’ pull together projects that will attract scale funds, and deliver the impacts they desire? Rather than get lost from the beginning in the world of finance-speak (as one does in the world of legal-ese), here are six bankability tests that might help ensure a project is fit for financing.
Are they right? Possibly not. Do they help stimulate the right conversation? We certainly hope so.
Six Smart City Project Bankability Tests
1. Will the user actually use the solution for its intended purposes?
- If not, then any potential user revenue will not flow; intended savings will not be delivered; re-work or additional investment may be needed to achieve the intended outcomes
So, for instance, the smart metering system in a building retrofit will help nudge residents to behave as intended (i.e. consume less energy), and not just open the double-glazed windows when it gets a little hot. Or a digital platform comes with credible plans as to how it will incentivise adoption and use, rather than take-up withering away after the launch event.
2. Has the technical solution been suitably de-risked?
- The maturity of the product (TRL) is commensurate with the scale of investment. i.e. pilot low TRL; ensure a proof of concept is in place (somewhere relevant); and implement the right volumes for mature technology to access economies of scale and strengthen (de-risk) the case
- Public (or impact) funds are deployed to stimulate policy action on harder to fund projects, and blended funds deployed to stimulate scale
- Interdependencies with other city systems have been suitably considered, to explore potential better or joint outcomes from shared investment by different departments or organisations; or to assess where there may be conflicts across city systems to resolve
- The capabilities are in place to operate the solution, internally or through partners
- And performance risk is assessed, and the role of protocols, capabilities, governance and insurance are all factored in to mitigate risk
A good example of this sits with the smart lamppost, where cities traditionally purchase in small volumes, where aggregation can generate substantial double-digit savings; and where multi-purposing the lamppost can deliver many other forms of additional value by considering the pole as a carrier for sensors rather than just for a light.
3. Has the regulatory and policy environment has been duly explored?
- Procurement procedures are held up so often as being a major blocker to bringing investors to public projects. On one hand that is entirely fair – procurement probity, press attention, and political motives can have distortionary effects. On the other, procurement is often only a short period in the overall lifecycle of an asset, and it does no harm to ensure that our hard-earned taxes are spent wisely. What is vital is that the resulting contract and how it is managed, provides the latitude where flexibility is needed, fair controls, and red lines where required. In the digital world flooded with data, many current contracts are found wanting
- There are other policy and regulatory conditions, or constraints, to be considered: planning, permitting, HSE requirements and the like. A distinction must be made between genuine compliance requirements and the perception of constraints that block matters. When one digs into things in more depth, there are often work-arounds where there is will and some application
- Efforts have been made to future-proof the solution by considering the life-long regulatory and policy context – hard to do; yet good to try
The idea of “regulation free-zones” was mooted many years back when the EIP-SCC got underway. Little has been heard about those seeds bearing roots. However, the 6-Nations Smart Cities Forum initiative did uncover some interesting approaches to address and overcome perceived (and at times real) challenges. And more recently examples, like how Amsterdam is approaching experimentation in energy systems in a district north of the river, demonstrate a real willing to challenge policy norms. Policy Labs offer scope to explore different ways to explore how to deliver policy goals and challenge policies where appropriate
4. Is there a clear logic and set of value indicators in place that can, and will, be monitored to demonstrate that the investment justification was wise?
- They’ll likely need to be more than just financial. And the investment community is increasingly tuning in to up social and environmental impact, and the SDGs
- A logic is essential to show how inputs lead to outcomes across the range of people, planet, and prosperity targets. That logic should also provide a solid basis to tailor to a city’s measurement norms (& perhaps influence them)
- The capital budget envelope has explored the opportunities for demand aggregation and economy of scale, to ensure best price and value
Cities often struggle to demonstrate return on investment. That’s not because they don’t wish to; it is because it is hard. Public value is complex. City systems are deeply inter-dependent. Actions often result in value returning quite far down the line. It can be hard to justify financial investment to deliver better quality of air. What’s the price of ill-health? It often only emerges after many years. sticking with a lamppost, there’s a good opportunity to use the powered pole to attach air quality monitors (or CCTV for greater safety; or environmental monitors for improved quality of life). Cities and investors both need to wrestle this bear down together.
5. Is the selected business model workable in relation to asset/service ownership and governance, life-cycle analysis, cashflows, asset value, local market maturity, debt capacity of the parties involved, etc.?
Putting infrastructure and service concessions onto the market is one means by which individual cities are managing to attract the investment to deliver desired outcomes. This works best where controllability for planning, implementation, or influence in operational use sits with the party that is investing. Some cities on the other hand, almost on principle, seek to own. And some institutional funds cover only capital investment, where a more nuanced understanding or indeed joining of capital and operating could deliver better end outcomes.
What is key is that agreements are established to manage change; that competencies are clearly in place to deliver, and that governance arrangements will oversee the process throughout.
An interesting area here is in the advancement of as-a-service models, particularly in the area of technology enablement. Technology changes so rapidly that public sector procurements
6. Has a consistent and trusted due diligence process and tools have been applied?
- A common approach certainly helps, as it captures best practices and will thus more likely be trusted. (There is perhaps an opportunity for national and international standards bodies here; to step beyond the more technical territory that is typically where they operate)
- Certification in some form will build confidence. Pragmatic certification that doesn’t put up barriers for busy city officials; that provides an easy on-ramp, and then leads to more thorough evaluations as the scale of the project increases and stage of development advances.
A good example of this is the ICP (Investor Confidence Project) approach that offers readily approachable templates and support to capture an energy project right from the starting point in a manner that makes sense; and helps to bring investors closer to the conversation.
Investment decision making is now becoming that much more challenging, and the high-profile legal challenge that put a (temporary?) blocker on Heathrow 3rd runway only goes to show that matters like sustainability and 2050 goals are starting to mainstream.
The gap between Cities and Investors must close, and that requires knowledge, skills, pragmatic tools and open discussion. So, let’s go to work on more of these things!