Tell me what your problem is and I’ll tell you what the solution is – money.
There is little doubt that citizens, their cities and communities as well businesses, all support the development of smart cities with its promise of increased liveability, sustainability, mobility, social and economic infrastructure and so on.
The enormous increase in population, as well as a backlog of infrastructure upgrades and delays, is leading to a massive boom in infrastructure investment – estimated by the G20 to reach the staggering amount of US$3.3 trillion by 2030. While a large part of this will go to the developing economies the developed countries are facing their own challenges, such as structural changes as a result of digital disruption; a new industrial revolution led by AI; climate change; decarburisation, an ageing population; and the integration of large numbers of migrants and refugees.
Many of these challenges will also be having an impact on local communities and cities, where the people are actually living. Yet their decision-making and financial power is severely restricted by higher levels of government, who increasingly support social and economic policies that are contradictory to the national interest. This is making it even more difficult for cities to address challenges caused by climate change, increased costs of energy, arrival of refugees and migrants and so on.
At a recent Joint Forum of the OECD and the Long Term Infrastructure Investors Association (LTIIA) it was stated that most (international) financial institutions agree that investment in long-term infrastructure will have a positive effect on GDP. According to the IMF, investment infrastructure of an additional 1% of GDP had, in its first year, a 0.4% effect on output and 1.5% in the following four years.
Unfortunately in most of the developed economies there is still little interest in public infrastructure funding and, as for example is the case in Europe, it is subject to very strict financial regulations. As well as this, since the financial crisis banks have also become far less interested in long-term financing projects. At the same time this has opened up opportunities for institutional investors for low-risk, long-term, inflation-linked investment opportunities.
In 2015 the OECD indicated that there was a US$5 trillion gap in long-term infrastructure investments and there is no indication that this gap is closing – on the contrary. The major problem remains a lack of willingness of the financial industry to accept infrastructure investment as a fully-fledged ‘asset class’.
In order to move forward greater public support is needed, with more government guarantees.
In the UK and Australia there are some food examples of this in the City Deals program and state governments are also more positive towards a more progressive financing policy of large-scale public infrastructure projects – sometimes linked to PPPs and sometimes directly under their own control.
While superannuation funds in the Netherlands have been more positive towards long term infrastructure investments , we also recently saw interest from a large Australian superannuation fund in investing in some of the infrastructure from Telstra, leased by the nbn company. While this didn’t proceed, it is another good example of changes that are underway in the financial market.
Taking Australia as an example. Investment in infrastructure needed for this country is estimated to be around $20 billion a year by 2030. A significant part of this could be linked to city deals, like projects where all three levels of government, as well as businesses and investors, are working in a collaborative way. If proves to be successful it would provide the confidence needed to look at more holistic smart city investments, whereby cross-sector investments based on ‘the City as a platform’ could create interesting business opportunities. At this stage these models are still vague, but with combined effort we should be able to get more clarity as the current projects evolve.
A similar concept is needed to look in a more holistic way at the many government investments in social and economic infrastructure. Looking at the last Budget of the Australian Government – Digital Transformation Agency, cyber security, ICT skilling, innovation hubs, e-health, new road and public transport, port infrastructure and Fintech – how, for instance, they could be linked into smart city developments to create a multiplier effect for these investments. This can only be achieved if the cities, in a collaborative structure, look at these issues and come up with combined proposals on how to create such a multiplier effect around these investments.
To achieve the maximum benefits here it could be opportune to start a national infrastructure data base of projects and plans. This would allow all parties to consider collaboration models, potential new business models around these investments, and the appropriate investment models for such collaborative projects. The European Investment Bank is currently investigating a similar project for Europe.
It is clear that if we are to get on top of the long-term infrastructure projects that are needed we must find new financial ways to secure the long-term investments needed for such projects; and it increasingly looks like the institutional investors could become the pivotal partner here.