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Many questions, many paths

How can the smart city be financed smartly?

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The sustainable financing of smart city projects is a major challenge. This also raises the question: private or state?

Picture: Müller + Busmann

The sustainable financing of smart city projects is a major challenge. This also raises the question: private or state?

The Smart City is a beautiful vision of future coexistence in urban and suburban areas. But here, once again, the question of an old carnival hit arises: "Who is going to pay for it?" While temporary projects are made possible by public funding, sustainable financing still seems to be largely unresolved. There is no shortage of ideas, however. "There are several ways in which cities can ensure sustainable transformation and 'smartification'," says Petr Suska, who works on the subject at the Fraunhofer Institute for Industrial Engineering IAO and, among other things, develops new evaluation methods and tools for integrating economic aspects into infrastructural and urban or regional transformation processes in the Urban Economy Innovation team.

"For example, several cities can pool resources to procure specific technologies - such as streetlights. In this way, municipalities share the risks and costs of smart city projects as well as their benefits through new forms of collaboration." This is also possible through the involvement of the private sector, for example through public-private partnerships, joint ventures, etc., he said.

Prof. Uwe Schneidewind sees the state in the first place as having a duty: "First of all, significantly more funding opportunities must be created at the state, federal and European levels. A highly indebted city like Wuppertal cannot finance such projects on its own," says the economist and mayor of the North Rhine-Westphalian city of Wuppertal. The city participates in the "Smart Cities Model Projects", a funding programme of the Federal Ministry of the Interior, for Construction and Home Affairs. This makes it possible to carry out some projects for which there were previously no financial or personnel possibilities, says Uwe Schneidewind. The inter-communal exchange is in the foreground. "However, it is not only about copying existing solutions, but also about incorporating the experiences of other cities and developing our own solutions from them, taking into account Wuppertal's situation."

The former president and scientific director of the Wuppertal Institute for Climate, Environment and Energy formulates the fundamental challenge as follows: "In order for successful projects to be transformed into lasting solutions, permanent financing must be ensured, because the operation and support of the systems used cost money." Some of the projects initiated are already being carried out with external participation. "Then we already have a natural partner for the subsequent operation." But on the whole there is still a lack of good examples that could be adopted. "Possible solutions could be financing through advertising or a private partner taking over. However, this usually means that the city loses some of its independence in terms of data sovereignty, which should be with the city precisely in the interest of the citizens." It makes more sense, but is rather unlikely, for the state and federal government to create a financial compensation, "so that all cities have the same chances to create a similar quality of life for their citizens as in rich cities".

For Fraunhofer researcher Petr Suska, innovation can only happen through innovative funding, new partnership formats and creative approaches. "Business as usual does not lead to real transformation or change." Some of the main obstacles, he says, are the conservative mindset, the so-called path dependency of many city governments, and a reluctance to form new partnerships and forms of collaboration. "Integrating innovative approaches in municipalities is difficult, but necessary to keep up with the ever-accelerating technological change and its impact on urban communities." There is also a lack of experience - and trust - in public-private partnership and alternative approaches to financing urban smart city projects, he said. "There is a fear of vendor lock-in, which is an issue with many smart city projects." So much for the hurdles from Petr Suska's perspective.

Petr Suska sees the most important opportunities in the currently very low interest rates, the willingness to invest of private and institutional investors, local communities and companies that are willing to finance urban pilot projects, as well as in the financial support from the European Commission, for example: "Projects for the energy transition and climate protection are receiving more funding than ever before." The banking sector is increasingly focused on supporting innovation in cities, he said. "This goes hand in hand with a strong trend towards green and sustainable financial products and investments. Cities are also working to develop different sources of financing for smart city projects and to involve banks in the development of new programmes and instruments."

The fact that finding investors is not enough is well illustrated by the example of Wuppertal: "Our experience from previous projects shows that we don't have to do a lot of advertising to be approached by other investors. On the contrary, investors tend to approach us because of the projects we have initiated," says Uwe Schneidewind. But: "For a long-term commitment, business models have to be developed that benefit both sides. Up to now, these have been few and far between.

Prof. Uwe Schneidewind is an economist, a member of the Club of Rome and was President of the Wuppertal Institute for Climate, Environment and Energy from 2010 to 2020. He has been Lord Mayor of the City of Wuppertal since November 2020.

Petr Suska

Petr Suska heads the Urban Economy Innovation team at the Fraunhofer IAO in Stuttgart, which develops new evaluation methods and tools for integrating economic aspects into infrastructural and urban or regional transformation processes.