Back in November 2016, I wrote an article (read here) describing various financing options available for Cities embarking on urban infrastructure digitization projects and, while it’s been less than three years since that post, it is evident that Cities and Municipal Corporations globally are on a fast track to adopt different financial structures that would help them acquire new technology to deliver more efficient and cost-effective urban infrastructure services like reducing energy consumption for public street lighting, reducing traffic congestion and improving revenues from city parking, improving efficiencies related to waste collection and bridging the digital divide using City Wi-Fi Services.
To understand the impending transition towards Consumption and Outcome-Based Revenue Models, it may be interesting to understand the journey Cities are making/have made to reach this point with:
(a) Smart City 1.0 that was all about rapid experimentation of testing technology for urban services with small pilot projects and PoCs.
(b) Smart City 2.0 was about deploying larger projects with Federal/State funding for specific Pan-City use cases like Energy Efficient Street Lighting, Customer Kiosks, Urban Security, City Wi-Fi Services, etc. through traditional procurement methods.
(c) Smart City 3.0 is the current phase of adoption of project financing using PE funds to achieve Capex to Opex conversion using Consumption-Based Revenue Models. This method of financing allows Cities to adopt new solutions for urban infrastructure renewal using risk capital but with a committed payout to the investor over a fixed period of time while allowing the investor to monetize and mitigate their investment risk by offering other revenue-generating digital services for an incremental upside.
(d) Smart City 4.0 is the future transition towards Outcome-Based Revenue Models in 2021/22 and beyond that is going to be an entirely new way of Cities deploying new urban services technology wherein the PE investment risk is deeper and more tightly tied to the revenue earned / costs saved by the City using the solutions deployed by the private partner.
Stages (a) and (b) are pretty self-explanatory and almost every City that has embarked on the journey and deployed some form of technology-enabled, urban infrastructure solution using these two stages are now at an inflection point to answer a crucial question – how do we scale these initial Projects / POCs into large scale, full city, multi-agency, multi-use case projects without seeking any taxpayer money from the City Council for the Projects? Most Cities are constrained for fresh capital and are under a lot of pressure to deliver urban services more efficiently with fewer resources. Hence, in a capital-constrained world that we live in now where expecting more with less is the norm, it is imperative for urban services technology providers to join hands with PE firms to evolve innovative project financing schemes that can help Cities and Municipal Councils adopt new technology on a City-wide scale of operations for the delivery of superior quality urban services. Stage (c) – Consumption-Based Revenue Models provides an answer to some of these questions and helps Cities fund their projects using external risk capital and commit to a payment schedule that would help cover the investor risk at least partially.
In conclusion, according to the State of Cities 2019 Report published by the National League of Cities in the US, Mayors mentioned economic development (74%), infrastructure renewal (57%) and budgets & management (41%) as some of the top priorities that they would like to address on an urgent basis.
These priorities tie in well with the adoption of Consumption and Outcome Based Revenue Models as it helps Cities address these priorities to initiate economic development and urban infrastructure renewal projects in the City without using taxpayer money, converting Capex to Opex thereby helping them manage their budgets effectively.
Below is an example of energy savings via consumption models: