By Julia DeIuliis
While the definition of “smart city” is constantly in flux, one common feature of smart city applications and initiatives is the use of sensors in infrastructure projects. Yet, despite calls for joint financing, a study by Alcatel-Lucent showed that most smart city projects are financed either by governments, government run development funds, or research grants. This blog post proposes different business models for engaging the private sector in financing sensor-enabled infrastructure.
Sensors provide several financial benefits across multiple categories of infrastructure projects:
- Improved data collection enables variable pricing (e.g. charging more for transportation, energy, or toll roads at high usage times) and allows for more efficient resource allocation and planning, by having a more accurate idea of where more resources are needed.
- Passive sensing allows the operators of public services to spend less human resources on inspection activities, and more on repair and corrective actions. Savings apply to both routine maintenance- for example, alerts to empty a trash can instead of manual inspection- and large scale asset protection, such as monitoring damage to bridges before a significant structural repair is necessary. Sunderland, a UK city, estimated that transitioning to cloud-based IT would save £1.4M per year in IT costs alone. For large scale prevention, FEMA estimates that every $1 spent on preventative measures saved $3.65 in repair costs.
- Proactive sensing lowers the long term operating cost of a building, by enabling operators to remotely reduce the demand for energy when a building is unoccupied, turning off outlets when not in use, and decreasing the need for security guards and maintenance staff. One meta-analysis showed that occupancy based controls reduced lighting costs 24% in commercial buildings, while EnergyStar estimates that a programmable thermostat has a lifetime packback of 20x the initial investment.
Sensors also provide a large amount of data that can be repackaged and monetized. For example, traffic volumes in retail areas could be sold to retailers, helping them to compare the foot traffic of different geographic areas, as well as compare their foot traffic with the average for their category.
In addition to the sensor provider, three private sector entities benefit directly financially from sensor applications:
- Building developers: building operators would pay more for a sensor-enabled building, which costs less to operate, increasing the asset value.
- Utility or service operators could spend less on inspections and charge more at peak times.
- Insurance companies would face a lower risk of covering catastrophic damage if sensors were in place.
Of course, these projects still require upfront investment, while many of the financial savings come over time. Like other infrastructure projects, pension funds, private equity funds, and other long term investment institutions could be good financing partners.
Additionally, unlike other elements of infrastructure projects, sensors have a relatively low upfront hardware cost, although installation and setup do carry some costs. Providers of sensor based services should lower upfront costs, and charge higher costs on long term software and service subscriptions.
For governments to provide additional incentives, without directly incurring costs, standards for sensor based buildings should become the baseline for future contracts. For example, since occupancy sensors decrease demand, each utility company should be expected to increase the number of customers they serve with the same asset base. Additionally, contracting out more basic public services, such as sanitation, would allow the private sector to finance more of the investment.
With these actions, sensor-based smart city initiatives can be some of the most profitable and attractive to private investment. For cities trying to figure out what it means to be “smart” and how they should begin to do so, these initiatives should be prioritized above other initiatives that simply focus on openness and transparency within the public sector.