View source for Understanding Utility IoT and Smart Cities Financing Best Practices

{{Chapter
| blueprint = Utility
| sectors = Utility
| authors = Ed Davalos, Kenneth Thompson, Scott Pomeroy, Derick Lee, Deborah Acosta
| poc = Pete Tseronis
| email = pete@dotsandbridges.com
| document = Energy-water-waste-management-blueprint.pdf
| chapter = 9005
| image = ChapterFinance.jpg
| summary = The Utility SuperCluster recognizes that while technology is now available; it is often difficult to secure appropriate funding to drive full scale technology adoption. Therefore, how technology is financed plays a major role in the success of IoT based solutions. This framework, while supportive of Utility centric investments, can also be applied in smart cities investments in general. This information provides a baseline for understanding challenges, government based options, and two perspectives on how to step out of the box with creative public and private sector funding opportunities. Contributions are provided by Smart Cities Council and Smart Cities Capital and is intended to provide a board understanding of this topic and framework as best practices.
}}__NOTOC__
So, let’s now start with a better understanding of Smart Cities IoT financing in order to establish a good
baseline to determine the best options when looking to finance projects. This perspective is summarized
from Smart Cities Council Smart City Finance Guide.

=1. City Financial Challenges and Opportunities=
In 2008, the world passed a milestone. That year, over half of the world’s population lived in urban
areas. There’s no foreseeable end to the trend that has today’s cities expanding at an unprecedented
rate and new cities emerging. The world’s total urban area is expected to triple between 2000 and 2030
and urban populations could double in that same timeframe. Such rapid urbanization carries significant
implications for the world’s ecosystems as outlined in a 2012 United Nations report.

Of critical concern is the growth in the number of mega-cities emerging in Asia, South America and
Africa. In 2011, the World Bank listed 26 cities with an urban population over 10 million inhabitants and
nine of them exceeded 20 million. These mega-cities – places like Tokyo, Mexico City, New York City,
Mumbai, Karachi, and Beijing – are enormous. And they’re expanding beyond traditional city boundaries
into dynamic regional entities. As critical economic hubs, cities contribute to national stability and
growth. Yet they are typically resource-constrained – a reality that becomes increasingly burdensome as
burgeoning populations put increasing pressure on often inadequate and outdated infrastructure, from
water and sewer systems to transportation networks. And these cities will remain fragile and struggle
under the demands of a swelling population unless we find ways to move the needle on making them
more sustainable. One solution we’re seeing in pioneering cities around the world is the use of
advanced information and communications technologies (ICT) to make infrastructure smarter and more
sustainable. By design, ICT-enabled cities – or smart cities – are more resilient during times of distress
due to effective resource allocation and infrastructure management.

=Matching the project to the financial tool=
Part of the challenge for cities is in selecting the right tool at the right time. As you read through this
guide you can familiarize yourself with numerous financing options available for various types of smart
city investments and see which ones are most appropriate for specific types of projects.

For instance, the European Commission expects energy consumption to rise by 50% over the next 20
years. That increasing demand for energy and the need to reduce environmental pollution are issues
cities everywhere must address. Renewable energy is one obvious solution — but renewable energy
projects are extremely capital intensive. The nature of capital projects is that there is a large front-end
investment with the benefits captured over the life of the project. Consequently, these are often
financed with some kind of long-term financing package. Renewable projects, e.g., solar power also have
other challenges; without some kind of subsidy, revenues can’t cover operating costs and a return of
and on capital. A public-private partnership may be a viable option with this sort of project.

The challenge with many of the newer smart city technologies is that would-be investors see them as
high risk because the ROI is uncertain. On the other hand, many projects that have uncertain ROIs can
be financed through traditional sources, albeit with lower levels of debt financing. However, projects
that embody some element of technology risk– first-of-a-kind projects, for instance – cannot attract
debt financing and generally require guarantees or other forms of credit support (or all equity
financing). The financing options outlined in this guide generally fall outside the realm of early
developmental venture capital. Rather, the tools highlighted in the pages that follow fall into four
general approaches:
*Government-based financing tools
*Development exactions
*Public-private partnerships
*Private fund leveraging options You’ll see details about each tool, case studies where they are being used and a standard scheme for evaluating them as a potential tool for any given capital project, including common pros and cons with each. But first, let’s quickly consider “The Project.”
=2. Ten Characteristics of Finance Options=
Never before have cities had quite so many new technologies to evaluate. Yet the speed and breadth of
technology advances – exciting as they are – also pose some real challenges for decision makers: Which
investment is the best for the community – and when? And how will the community pay for it? While
financing options are not evolving quite as fast as technology, they are evolving nonetheless. But before
we drill down on specific options, let’s look at the 10 characteristics that should help decision makers
see how different types of projects in different types of communities demand different types of
financing. This chapter will focus on these characteristics:
==1. Sources of capital==
A concern when considering finance options is the source of the capital generated by the tool. There are
multiple possibilities ranging from dedicated fees for service, targeted tax tools, general tax sources,
private investors or even philanthropic support. Understanding the source of the capital is important for
three reasons:
*Such awareness will help decision makers understand the institutional context of those responsible for the capital financing decision.
*This institutional understanding will help decision makers be as sensitive as possible to the risk concerns of investors.
*That risk concern will help in constructing the request for financing by highlighting certain aspects of the project that address risk drivers.
==2. Number of Parties==
Rarely is financing for capital intensive infrastructure projects determined by one person. Normally
boards are involved with various members bringing their values and concerns to the decision.
Depending on the source of the capital, the parties involved in the financing decision may have
conflicting goals or different values. For instance, in a public-private partnership, the values of the public
officials will not be driven primarily by a profit motive, as it logically will be for private investors.

Understanding the number and identities of the parties involved in a financing decision will enable a
clearer presentation of the project to address everyone’s goals. Still, the more parties that are involved,
the more challenging the financing is likely to be. The least challenging, of course, are those rare cases
where an agency can self-finance its infrastructure investment without reliance on external funding.
==3. Ease of securing financing==
Not all finance mechanisms provide the same level of accessibility. Some are relatively easy compared to
others, and much of the ease is dictated by how sensitive the option is to the risk associated with the
project. Another factor that can make securing financing easier is the extent of control the financing
agent (whether a utility, local government, limited partnership, etc.) has over the revenue stream
dedicated to paying off the investors. The “safer” or more predictable the revenue stream dedicated to
repaying the upfront financing is, the easier the financing will be. For instance, in a tax increment
financing (TIF) arrangement, the revenues to repay upfront financing are tied to future (and therefore
speculative) increased land values or taxes.

Because of this speculative aspect, local governments that seek financing based on TIF arrangements
often have to back up the future revenues with promises of other revenues should the future
development not materialize. That guarantee lowers the risk and eases the likelihood of financing in
such a scenario. As discussed below, lower risk also lowers the cost of borrowing. Ease also involves how
stakeholders perceive the option. If stakeholders buy into the project and the financing model, securing
the financing can be easier than when they do not. Some of this ease has to do with how the model and
its transparency are communicated.

Each tool presented in the guide is scored on this “ease of securing finance” characteristic. The scoring
ranges from one (very easy) to five (very difficult). The score takes into account factors such as control
over dedicated revenue streams, how many parties are involved in the decision, risk elements and
interest costs.
==4. Duration of financing==
Different kinds of projects will need different kinds of financing tied to them. Some projects are
relatively short term, focusing for instance on material procurement only. In those situations, short-term
financing tools will be most appropriate. Other situations may call for medium-term financing.

For example, cities and transit agencies have to finance bus fleets. Such assets have a 12-year or a
500,000 mile recommended life expectancy (though currently the average retirement age for public
transit buses has risen to 15.1 years due to budget pressures). Medium-term financing tools would be
appropriate for replacing buses on schedule (or other similar capital assets). And this actually saves
money in the long run since the maintenance costs for vehicles beyond their recommended life are 10%
to 50% higher. Regardless, dedicated transit funding must be available to repay the costs of the upfront
capital borrowing.

In situations involving financing an infrastructure asset, such as a major bridge or building, decision
makers need access to financing tools with longer time horizons, as these assets have expected life
spans that often exceed 50 years. These projects also tend to have significant upfront costs for
construction and thus will require access to deeper pools of finance capital. For purposes of classifying
each of the finance options, each tool is scored in terms of its most common duration usage:
*Quick tools are those that typically finance projects of a year’s duration.
*Short-term tools are for projects of a two- to five-year duration.
*Medium-term tools fund projects with a six- to 15-year duration.
*Long-term tools target capital projects with life spans that exceed 15 years.
Finally, some finance tools are actually ongoing sources that are supported with ongoing dedicated
revenues, such as a surcharge on a fee for service collected by a utility. The revenue generated by the
surcharge could be dedicated to ongoing infrastructure improvements, a practice common in the
telecommunications industry.
==5. Risk to investors==
Investors want a return that is commensurate with the risk. Buyers of municipal revenue bonds buy
based on an assessment (contained in the offering memorandum) of the revenues generated to pay
bond principal and interest with the expectation that both will be repaid. Equity investors, for example
in a public-private partnership project, take more risk and receive higher returns.
==6. Risk to borrowers==
Investors aren’t the only ones facing risk in a finance decision. Those borrowing the capital (or those
they represent) also face risks that decision makers should keep in mind when determining the relative
merit of one funding option versus another. Most of this risk relates to how commitments to pay back
borrowed capital are structured relative to the likelihood that the new technology and/or infrastructure
will generate the savings or revenues to the extent necessary to cover the borrowing costs.
==7. Tax implications==
It’s important to understand the goals of all of the parties involved in financing smart technologies. For
cities interested in creating more sustainable infrastructure, financing is a means to achieve that goal.
For an investor, the financing goal is to achieve a reasonable return at an acceptable level of risk.
==8. Source of repayment==
Financing tools are basically instruments to facilitate borrowing today and repayment over some period
in the future — plus interest. As capital is repaid, it and the interest become available for additional
financing of other investment options which in turn fuels additional capital growth.
==9-10. Advantages and disadvantages==
In addition to the eight characteristics above, this guide also highlights some of the advantages and
disadvantages of each of the tools. These are all tools that can be used individually or in coordination
with other tools to provide capital financing for a wide range of evolving technologies and infrastructure
needs. Therefore, one score across all six characteristics is not going to be truly useful as an indicator of
the best tool to choose.

=Financing tool availability can vary from city to state to country=
The financing tools highlighted in this guide are available in the United States today. Most are also
available in European Union nations as well, though some go by different names. But not all of the tools
are available in every nation.

Furthermore, the tools may be limited to different kinds of projects from nation to nation. This is true
even within the U.S., as some of the state-based tools apply only to certain types of investment projects.
So, while this guide illustrates tools, those interested in utilizing them should do their due diligence in
learning if and how such tools can be used in their location.

=Success is not guaranteed: Why failures happen=
One final consideration before we get into the finance tool chapters. Any of the tools presented in this
guide have the possibility of success. But they can also fail. Here are four examples of why that happens.
First, seeking benefits without doing adequate research can lead to higher costs and lower returns.

Second, market failures can be widespread and intrinsic. Intrinsic features of a system can include
information problems, imperfect competition and resource allocation based on existing information and
experience and not on opportunities.

Third, funding and model mismatch can occur when funds are not structured or timed appropriately.
This can lead to elevated fixed costs, freezes in resources and lower project quality. And accountability
to stakeholders is careless. Not to be confused with control, accountability involves reporting on the
development of the project and the achievement of pre-determined outcomes and impacts.

Accountability assists with eliminating unrealistic expectations through the course of the project. Not
managing expectations with stakeholders can give rise to situations such as the established funding
period being too brief — a common problem with financing in the private sector.

=Government-based Financing Options for Cities=
General funds in most cases are supported by a city’s taxation authority as their primary source of
revenue to pay for services citizens expect their city to provide. But general funds are usually only
available to pay for regular annual operating expenditures.

Many city projects involving smart technologies represent infrastructure upgrades that last well beyond
one year. So to protect citizens, cities also maintain capital funds separate from their operating funds.
These are used to repay the financing of long-term investments in infrastructure with life spans over
many years.

Under the model of public finance, governments issue debt instruments with an agreement to pay back
the debt, usually over the lifespan of the item being financed at some agreed-upon interest. By far the
most common family of tools to pay for these kinds of capital costs is a government’s bond activity.
Bonds are an important method of financing smart cities. Most bonds are issued by governments or
corporations with an underwriter that provides the borrower with the full amount of the financing by
buying all the bonds issued and then reselling them to investors at a profit on the open market. Of late,
bonds have been used heavily to finance renewable energy initiatives. In this chapter, we’ll focus on 12
government-based financing tools. Some will be familiar, some perhaps less so:
#General obligation bonds
#Revenue bonds
#Industrial revenue bonds
#Green bonds
#Qualified energy conservation bonds 6. Social impact bonds
#Public benefit bonds 8. Linked deposit programs
#Energy efficiency loans
#Property-Assessed Clean Energy Programs
#User fees
=1. General Obligation Bonds=
General obligation (GO) bonds are one of two common types of municipal bond instruments. Such
bonds are typically used to finance basic core infrastructure investments at the local level of
government. These could be GO bonds to finance a new park, a new city hall, a new forensics crime lab,
a library, a light rail line, a new school and so forth. In the GO framework, the issuing entity — city,
town, county, school district, etc. — backs the issuance of the bonds with the full faith and credit of the
jurisdiction. In practice, this means that the jurisdiction will tap its tax revenues at a level sufficient to
repay the bond buyers plus interest. Selling bonds yield capital immediately for project construction,
with the repayment of the debt taking place over the life of the asset created. The important distinction
of GO bonds is that they are guaranteed with taxpayer revenues.
=2. Revenue Bonds=
A second popular form of municipal bond is the revenue bond. While the GO bond is guaranteed by tax
revenues of the issuing jurisdiction, a revenue bond is paid back from revenues generated by the asset
the bonds funded. Municipal projects that can generate revenues, such as a parking garage, can be
financed with revenue bonds because parking fees can be dedicated to paying back the debt and
interest. With a revenue bond, there is no guarantee that tax revenues will “back stop” any shortfall in
bond payments should the asset revenues not be sufficient. As with GO bonds, selling revenue bonds
yields capital immediately for project construction, and repayment should occur over the expected
lifespan of the asset.
=3. Industrial Revenue Bonds=
Industrial revenue bonds (IRB) are another bond instrument issued by both municipal jurisdictions and
state governments. These are most commonly issued as part of an economic development initiative in
which the local jurisdiction issues IRBs and gives the proceeds to a private firm for development. These
might involve capital improvements, expansions, facility enhancements or renewable energy and
renewable energy efficiency upgrades. The firm is ultimately responsible for paying back the debt. That
means the debt does not influence the city’s rating, since the city has no obligation to repay.
The jurisdiction holds the asset as collateral until the debt is repaid. Because of that, there is often no
property tax on that asset. This can be a significant savings for the private firm and is why jurisdictions
use IRB deals as incentives to encourage business expansions or relocations to the jurisdiction.
Another appealing aspect is the tax-exempt status of the IRB due to issuance by a government
jurisdiction. This means private firms can get lower interest financing through IRBs.
=4. Green Bonds=
Based on a practice begun in Europe, green bonds are instruments issued to raise capital for funding
specific clean power, carbon-reducing projects. Since 2008, the World Bank has issued over $4.5 billion
in green bonds. The U.S. federal government seeded a green bond fund with $2 billion in 2004
legislation.
=5. Qualified Energy Conservation Bonds=
Established by the U.S. Energy Improvement and Extension Act of 2008, Qualified Energy Conservation
Bonds (QECB) are another relatively new bond instrument designed specifically to, as the name implies,
fund qualified energy conservation projects.
=6. Social Impact Bonds=
Structured bonds are yet another option for financing capital projects. These bonds determine the value
of capital at the bond’s maturity. Social Impact Bonds (SIB), also known as Pay for Success, are unlike
conventional bonds that offer a fixed rate of return. The SIB payment is contingent on the social
outcomes agreed upon by the investor and the issuer.
=7. Public Benefit Funds=
Public Benefit Funds (PBF) typically support energy efficiency and renewable energy, although not in
every case. PBFs were born out of the electric power industry’s restructuring in the late 1990s as a way
to fund initiatives that were inadequately supported by competitive electricity markets. They also reflect
a desire on the part of states to create energy efficiency and renewable energy programs. PBFs are
essentially the collection of funds generated by a small surcharge on customers’ electricity bills, no
matter who the electricity provider is. The surcharge generally ensures that money is available to fund
investments by publicly managed efficiency projects. One drawback to PBFs is how they are allocated
and reallocated. PBFs serve as tempting targets for state legislators and governors who need to fill state
budget gaps.
=8. Linked Deposit Program=
State treasurers have some discretion regarding options for utilizing surplus state revenues. As the
manager of state-generated funds, state treasurers have the authority to invest available state funds in
secure loans, often at below-market interest rates, to a guaranteed return.
=9. Energy Efficiency Loans=
Another tool championed by an increasing number of state treasury departments is energy efficiency
loans. These are low-interest loans to individuals who want to finance capital improvements to their
homes. While the eligibility for types of improvements varies by state, the general intent is to lower the
barriers for homeowners to upgrade their homes with more energy efficient heating and cooling
systems, water recycling/reclamation equipment, insulation upgrades, door and/or window
replacement and the like. Under these plans, the government or a partnering bank makes the loan,
using state money as the capital for the borrower to use in purchasing and installing the upgrades. Since
the capital is state money, the interest rate can be below market rates while still covering inflation
losses and yielding a small return on the investment.
=10. Property-Assessed Clean Energy=
Property-Assessed Clean Energy (PACE) represents one of the newest mechanisms available for
financing energy efficiency and renewable energy improvements. This program allows property owners
to borrow against their property taxes to fund energy efficiency improvements.
=11. User Fees=
User fees allow cities and other local jurisdictions to impose fees to cover the cost associated with
funding services and enhancements to increase the quality of life and cover administrative and
regulatory processes. Not to be confused with taxes, user fees are paid by choice, for example, paying a
toll to drive in highway express lanes. Taxes, on the other hand, are compulsory and support
government operations across the board. In addition to assigning project costs to project beneficiaries,
the attractive thing about user fees is that they can be used to secure financing to fund all or parts of
large capital projects.
=12. Development Exactions=
Government-based financing tools are the most common for funding unproven smart technologies, but
they are not the only options available for capital projects. A second set of financing tools highlight the
regulatory power of governments to force developers to pay for the infrastructure services their
developments will utilize.

These developer exaction tools consist of conditions or financial obligations imposed on developers that
help local governments cover the marginal cost increases and load burdens caused by the development.
Some of the additional revenue can also be used to provide additional public facilities or services
required due to the new growth. With exactions, the intent is to protect the public from the negative
effects associated with growth.

Exactions also protect the community from the increased cost of providing infrastructure by passing a
portion of the cost on to the developer at the time of development to synchronize the payment of
infrastructure. Cities are increasingly relying on exactions to help finance the impacts of new growth on
public facilities due to budget shortfalls, cuts in state aid and taxpayers’ unwillingness to increase tax
rates.

=Bringing the Public and Private Sectors Together=
Between federal government support waning and lingering effects of the global financial crisis, fiscal
strain has become a mainstay for many public agencies. Yet the increasing challenges of urbanization
make it imperative that the public sector find creative ways to finance smarter, more sustainable cities.
With this fourth type of financing option we shift from the coercive role of government jurisdictions to a
more collaborative approach where public sector and private sector interests work together on a shared
project.

This partnering approach has received increasing attention over the last 25 years. Public officials
recognize that the private sector traditionally has access to larger pools of capital — human, knowledge
and financial. And working with the public sector has distinct advantages for the private sector in terms
of zoning and access to public spaces.

Today the challenge in many areas is determining which services or parts of service delivery are best
managed by the public sector and which might be better managed by private or nonprofit partners. New
arrangements involving partnerships with the private sector, nonprofits and international non-
governmental organizations are emerging with increasing regularity.
We’ll look at four public-private financing vehicles in this section:
#Public-private partnerships
#Pay for performance
=1. Public-private Partnerships=
Public-private partnerships – sometimes referred to as PPP or P3 — are agreements between a public
agency (federal, state or local) and a private-sector entity that uses the specific skills and assets of each
sector for the delivery of a service for the general public. P3s are probably the most complicated and
least understood financing tool available to cities, but one that more and more cities are embracing.
These partnerships can take many forms, but they generally seek to balance responsibilities, risks and
rewards among all parties involved. They align the public good with commercial objectives designed to
enhance the private sector’s bottom line. Cities interested in investing in smart technologies, for
instance the contact-less transit ticketing system mentioned earlier, face substantial upfront costs. For
most jurisdictions this poses a challenge due to constrained budgets. Yet partnerships with private
sector companies are particularly useful because they can offer technical support, capital funding and
oversight of operations.
=2. Pay-for-performance=
Pay-for-performance contracts (or performance contracts) are similar to the social impact bonds. They
are commonly used today for energy-related projects. Performance contracts usually involve a private-
public partnership where the private sector works with the public sector to implement a new more
efficient or more sustainable technology. In most cases, the private sector business will offer financing
for equipment, repairs and new developments. In exchange, both entities enter into a performance
contract where the private partner identifies and recommends efficiencies that can be paid for through
the savings realized.

Typically, upgrades are guaranteed to the point that savings will meet or exceed annual payments and
cover all project costs. Should the anticipated savings not materialize, then the private partner pays the
difference. Pay-for-performance contracts can be very beneficial for both public and private partners.
The contracts provide financing as well as project development and implementation costs. The owner
gets the immediate advantage of savings from reduced consumption without making a capital
investment or assuming debt. But there are drawbacks to performance contracts. Projects financed with
performance contracts are more expensive and less capital efficient. The owner will pay higher (non-tax
exempt) interest rates – two to three times higher than tax-exempt rates by relying on performance
contract financing.

=6: Tapping the Private Sector=
Government-led financing, development exactions and public-private partnerships are all groups of
financing tools in which public sector money plays a significant role. The challenge in recent years has
been attracting more private investment dollars into the finance market for smart infrastructure
projects. Leveraging private sector funds, which are potentially larger pools of finance capital, can be
useful for financing projects that will improve livability and have long-term impacts on a city’s economy.
State governments often invest in private sector funds as a way to diversify their investment portfolios.
For the private investors, investing in new technologies can improve their company’s bottom line by
attracting consumers and reducing costs. It’s important to note that there can be some unintended
consequences in leveraging private sector funds, such as excessive or unbalanced risk exposure or
insufficient returns.
Private sector finance tools are categorized in the following list.
#Loan Loss Reserve Fund (LRF)
#Debt service reserves
#Loan guarantees
#On-bill financing
#Pooled bond financing
#Pooled lease-purchasing finance
#Value capture
#Tax increment financing
=1. Loan Loss Revenue (LRE)=
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, President Obama signed the
Loan Loss Reserve Fund (LRF) in 2009. Although LRFs are not a new banking concept, LRFs help improve
under-banked consumers’ small-dollar loan options by expanding the number of responsible lenders
and products available in the marketplace. LRFs are useful in markets where financial institutions make a
series of small loans for projects such as energy efficiency improvements.

=2. Debt Service Reserves=
Debt service reserves allow states and local jurisdictions to set aside cash reserves to guarantee the
payment of the principal and interest of a bond. Much like a loan loss reserve fund for private loans, this
service is useful for bond issuers who want to boost the security of their bonds and states or local
jurisdictions that want to expand the market for their bonds while reducing the bond coupon rate.
=3. Loan Guarantees=
One method that U.S. states and many nations use to minimize risk for private investments is
guaranteeing the repayment of a loan in case of default. Similar in logic to the loan loss reserve funds,
loan guarantees allow the federal government to work with private companies and lenders to mitigate
the financing risks associated with new projects.
=4. On-bill Financing=
When smart cities encourage their citizens to adopt new green technologies, public-private partnerships
can often be leveraged for the best possible outcome. Yet citizens are often slow to adopt new
technologies due to lack of upfront funds to pay for them, reluctance to adopt something unfamiliar,
unforeseeable savings and high financing costs. In such cases, two types of programs are available to
citizens to accelerate adoption: utility-enabled financing and repayment and user fees. On-bill financing
(also known as utility-enabled financing and repayment) allows the local utility to decide the best
upgrade package that can be reasonably financed. The utility then oversees the upgrades and customers
are assessed a fixed monthly charge on their utility bills to pay for the upgrade.
=5. Pooled Bond Financing=
Pooled bond financing is another option that helps generate new capital. Predominantly for state and
local governments, nonprofits and private companies can benefit from pooled bond financing too. With
this tool, a sponsor sells an issue of bonds, the proceeds from which are used by a number of state or
local jurisdictions, or other tax-exempt organizations. The goal is usually to help smaller borrowers (e.g.,
small towns) get access to capital with lower costs than they might be able to on their own, given their
credit ratings. The bond program features a common debt service reserve fund, which is funded from
proceeds from each bond sale and kept at a level equal to 5% of the principal amounts on each
individual loan. The common debt service reserve fund is meant to enhance the credit strength of the
program so that it is greater than the credit of individual borrowers. Using bond insurance, premiums
are allocated to each borrower based on their credit strength, so no borrower is subsidizing any other
borrower.
=6. Pooled Lease-purchasing=
With pooled-lease purchase financing, a government agency purchases property or equipment on an
annually renewable contract. Financing can come from either a financing institution or the government
may issue certificates of participation where investors can purchase a share of the lease revenues. 

the end of the lease, the agency that issued the debt can sell the property or equipment to the
jurisdiction for a minimal amount. This financing mechanism is particularly beneficial to states because
smaller projects can be combined to receive longer loan terms and lower interest rates. However,
forming a pooling agreement can be difficult when attempting to combine projects at the same time for
financing.

=7. Value Capture=
Guided by the principle that those who benefit from public infrastructure should pay for it, value
capture is the identification and capture of increased land value from resulting public investment in
infrastructure. Local governments have widely used value capture instruments to incentivize and/or
invest in infrastructure improvement in blighted areas where private investment risk would be high.

Using special taxes and community improvement fees, local jurisdictions can capture part of the value
created for private investors as a result of the jurisdiction’s investment in improvements. For instance,
an improvement in a city’s public transit system that upgrades the system’s efficiency and accessibility is
a benefit to neighboring properties. This benefit is the increase in higher land values and, perhaps, an
increase in business for property owners. Since they benefit from the improvements made to the transit
system, they should pay for receiving those benefits through the city’s choice of assessment, which
could be an imposition of public transit impact fees, land-value taxation or capture of property tax
increments through TIFs.

=8. Tax Increment Financing=
Tax increment financing (TIF) is a public financing method that essentially finances debt in anticipation
of future tax revenues. TIFs allow cities to begin infrastructure and community improvement projects
with borrowed funds with a promise to pay those funds back with additional tax revenues generated
from the increased property value in the area around the development. In many areas where TIFs are
used, the area of proposed improvement is categorized as underdeveloped, blighted and as a site with
potential to save and/or bring in money if developed. TIFs usually pay for streets, sewers, parking
facilities, land acquisition, planning expenses, job training, demolition and clean-up costs. In most cases,
cities consider TIF projects a viable option because the proposed development of the area is anticipated
to spark an increase in property values. The logic of this form of financing can be applied to smart
infrastructure projects as well.

=Conclusions and additional resources=
Governments around the world are coming to terms with the realities associated with the population
explosion on the way and the urbanization it will spawn. Innovations in technology will dramatically
improve the livability, workability and sustainability of tomorrow’s cities. New ideas for matching
solutions to problems through partnerships between the public, nonprofit and private sectors are
emerging every day.

The challenges presented by increased urbanization are not insurmountable, but do require
entrepreneurial approaches that bring to bear the creativity of the private sector with the commitment
of public officials. As we’ve emphasized, the single greatest barrier to meeting these challenges is
financing. The information provided focused on financing tools available to decision makers looking for
the right financing option for their project. Not every tool is available in every jurisdiction around the
world, but the collection serves as a starting point for exploring options. And city leaders will need to
consider some of the nontraditional financing arrangements that may prove a better fit for the kinds of
smart technologies they want to see in their communities.

=Contributions=
This material is shared with the written approval from Smart Cities Council from their Smart Cities
Finance Guide. The full report is available here. A special thank you is provided to Jesse Berst, Founder
and Chairman of Smart Cities Council for supporting the NIST GCTC Utility SuperCluster.

=A Second Financing Perspective=
This second smart cities perspectives is provided from Smart Cities Capital and focuses on public-private
financing as an innovative approach to financing smart cities IoT based projects.
Smart city and IOT adoption have two common challenges The first being actual “know-how” and an
even more significant challenge, is a flexible consumption and/or self-funding and variable risk,
structures. Establishing an end-to-end, collaborative, ecosystem that can provides experience and
“know-how”, while leveraging disruptive vendor agnostic outcome based business model, on a multi-
year, portfolio based structure, assures that the overall requirements can be addressed and not just a
fraction of what is required.

The learning curve is great and the typical approach of various proof of concepts have proven to not be
the most effective as many equipment of solution manufactures have the ability to self-fund a few
hundred thousand dollar pilot, yet few, if any have the risk and financial appetite to exit the pilot and
fully fund the long term, multi-million dollar smart city project in a fashion that allows the municipality
to implement said project in a fashion that is either self-sustaining or better yet, can actually generate
revenue that covers the monetizing projects AND can support other projects, that cannot be monetized
such as safety and security, etc.

Herein lies the conflict where lots of traditional money exists in the market, and lots of technology and
service providers want to support smart city projects, however, most want to do it under legacy models
where the investment grade counter party (City, state of with the support of a risk mitigating agency), is
assuming the risk and therefore the manufacturer or service provider can recognize the sale, the
government agency assumes all of the risk in what may appear to be low cost funds, yet WITHOUT
considering risk adjusted outcomes since the monetization, for the most part relies on variable risk
factors such as off-load, our of home or savings share in order to achieve the required CAPEX and on-
going OPEX for a 10 to 25 year project.
=SMART CITY COMPLEXITIES / REQUIREMENTS (BULLET FORM)=
*Smart City Complexities:
**Many cities understand the importance of transforming via Smart City Projects , few know
how to actually do it.
**Most Cities and Agencies agree that budget and flexible risk sharing models are required even when funding is relatively inexpensive as is the case with municipal bonds, pension funds and traditional loans and leases. Even if they cost at a 0% cost of funds, most have no ability to
commit to additional debt and existing or available funding is far lower than projects require.
**Leaders and general citizen, due to lack of information or understanding, object city assets / revenues being in the hand of 3rd party entities.
**PPP’s development can be a protracted process requiring significant work extending cycles beyond SC critical path timelines
**Legacy / existing bond or Federal funding programs may severely limit how existing assets can be included in SC project.
**Majority of the larger and comprehensive SC projects will be true first of its kind or with limited existing POC’s globally
==Current Reality:==
The aforementioned conflict has resulted in a reality where many solution and service providers,
along with tier-1 cities, have implemented pilots:
*Which cannot be exited
*Where project cycle times are taking much longer than expected
*Have quickly introduced uncertainty as it relates to on-going investment versus true revenue
*Deliver margins for the providers, yields for the investor and outcomes for the respective government agencies in a manner that cannot live up to the expectations of all concerned parties 
Today, the consultants, advisors and tradeshow promoters tend to be the primary ones actually
making money. Meanwehile, many of the same core players and cities meet in multiple venues,
discussing the same key points.

Other additional points are also material in that a majority of the attention is being focused on the
tier one cities, and an equally important need exists in tier 2 and 3 cities, as well as rural areas.
Factors that are also indirectly impacting the market are accounting changes where muni leases
may no longer be treated outside of the cities balance sheet as well as the under appreciation of
the escalating operational cost of processing the exponential data that smart city projects
generate, while only a 15% to 30 % is actually valuable. Investment in city owned data center
required expansion or even 3rd party cloud providers is a material cost regardless of the option
selected.

As this document will illustrate, real solutions exist which can overcome these challenges, if they
are leveraged.

'''Overcoming Challenges, Leveraging New and Emerging Solutions and Providers:'''
In order to overcome most of the key challenges, it is important that a city work with a
consortium that can truly deliver an end to end solution that covers both the “know-how” and
variable risk funding challenges.

The following represents these key solution attributes, which include but are not limited to:

'''Needed Eco-System Coverage and Capabilities:'''
*Must have Strong Project Focused, Financial Backing, For Projects of All Sizes
*Ability to Build, Operate and Transfer Projects, with Terms Lasting from 10 to 25+ Years.
*Varying Business Models Supporting, Project Financing, Savings Share, Revenue Share, with matched funding for each type of risk.
*Portfolio Approach, Allowing A City to Combine Various Project Types Over a 3 to 5 Year Horizon.

'''Required Project Portfolio Models (Partial List):'''
*Smart City and Internet of Things (IOT) Solutions:
**Self-Funding – Monetized Solutions
**Savings Share Structures (Lighting, Transport / Fleet, Connected Assets, etc.)
**Structured Finance / Debt (In Lieu of Bond or Similar Structures)
*XaaS / Private Cloud / Dynamic Data Center as A Service (Supporting Data Processing)
**Structured Debt and Muni-Leases (Covering the City’s Committed Portion)
**Legacy Asset Conversion (CAPEX to OPEX, enabling off-balance sheet treatment)

'''Existing Funding AND Net New Revenue Sources, Details:'''
*Existing Committed Budget / Funding (CAPEX OPEX)
**Approved annual procurement and capital improvement budget
**Approved and on-going annual Operating Expenditure Budget
**Previously issued Bond or similar public debt funding
**Federal, State or other Agency provided funding
• Net New Revenue Sources (Monetizing of Smart Parking, Smart Lighting, Smart Transport, etc.)
**WIFI/ Access capacity (core and excess) sold to local Service Providers and Virtual Service Providers (off-load fees)
**Advertising Revenue embedded into Smart Lighting, Smart Transport, etc. (Key revenue in various projects)
**Smart Project (Smart Parking, etc.) generated revenue from parking operation, tolls, concessions fees, applications, etc.)
**Big Data Analytics subscription by targeted interested parties
**Application Revenue Sharing, supporting learning, commerce / shopping and similar uses
**Structuring / Origination Fee charged to some of the eco-system partners linked to specific Smart Project enablement
=IMPLEMENTATION COSTS (TYPICAL)=
*Project Specific Expenses:
**Procurement of Required Bill of Material (BOM) Solution (Hardware, Software, Services, Applications, etc.)
**Installation, integration and on-going maintenance / management of the SC specific project
**Required Licenses / Fees required for the providing of actual services
**Project Specific Taxes, registration and other fiscal and legally required expenses.
**Replacement, Tech Refresh assets, if applicable, parts required to adhere to project specific service level agreements
**Reserve to cover penalties associated for breach of related SLA item

'''Reserve for early termination and fiscal out option required in committed SC funded projects.'''

*Smart City Adoption / Project Success Requirements
**Top down support is critical from the city or agency and long standing silos make cross-agency support difficult.
**Ability to directly engage with; A) Agency or City Head, B) CTO / CIO, C) CFO or Finance Leader, Collectively D) P3’s leader if applicable, Legal and Support Personnel.
**Long Term Concession (10 years to 25 plus years) supporting net new revenue sources (Advertising, Big Data, Off-load Fees).
**Creation of collaborative partner Eco -system enabling a true end to end solution covering both enhanced Citizen Experience and Net New Revenue sources supporting a portfolio approach leveraging committed and new revenue sources.
*Engagement model that allows for linking of various SC projects in order to deliver a comprehensive project.
**Experienced project team (Project Managers, Contract negotiators, PPP and Agency liaisons, etc.)

'''Smart City Adoption Challenge Framework Net Away:'''

Smart City solution adoption is critical for a city’s economic development and the challenges for the city
and the solution providers are real, however the outcome based model approach referenced in this
document can help cities of all sizes. Applying these solutions across the top use cases can solve the
challenges faced by the solution and service providers as well.

An important point of clarification, is the need to work with a business model or solution provider that is
truly agnostic as to the actual hardware so that the city or agency can select from all available options
and not be held limited to solution providers that finance only that OEM’s and other non-competitive
products.

Summary value points covered in this framework are:

*Provides the Smart City expertise / know-how required in order to accelerate typical learning curve.
*Supports Projects to be realized with reduced or no risk / cost to the City or Agency (incremental CAPEX and OPEX budget)
*Directly provides incremental revenue creation via revenue-sharing or savings share.
*Allows SC projects to move forward that would otherwise not be able to or could only be a fraction of required solution.
• City is able to retain control of its destiny, including data and other valuable assets via an enhanced structure versus other models that may appear to be free, yet reduce value and control for the agency or City.
The recommendation is to work with innovative, end to end solution providers (technology, business
and operate model), and not just legacy players, so that the city’s smart city objectives can be positively
impacted, driving economic development and digital inclusion for all.
=Contributor=
Oscar Bode is the CEO & Founder of Smart City Capital. Smart City Capital (SCC) is a new global company
formed by leading IT industry executives, highly experienced in IOT, Smart Cities, Service Provider
(Backhaul, Small Cell, Cloud and XaaS), and Outcome Based funding solutions. Smart City Capital has an
end to end partner eco-system including various fortune 100 technology, service providers and
operators, channel partners, lenders and asset managers.

Additional information can be found here or by contacting Oscar Bode at obode@smartcitycapital.net