Measuring ROI against smart city projects is difficult but not impossible. Here’s how city planners are crunching the numbers to acquire (and allocate) funding.
With growing urban populations, modernizing economies, and increasingly limited resources, cities are under tremendous pressure to develop sustainable solutions that foster development. While some municipalities have already gone full bore into smart city initiatives, others have struggled to convince city stakeholders that real value is there to be had.
Research and case studies abound proving out a general understanding that smart city projects can improve the quality of life for urban residents, and enhance economic development. But when it comes time for vendors and city planners to navigate the rigorous labyrinth that is the public procurement process, their pitches often fall short.
In essence, city planners face something of a Catch-22; To capture ROI from smart city projects, they first need to prove it out. In addition, smart city initiatives often have wide-ranging and non-quantitative benefits, such as citizen satisfaction rates. Accurately accounting for smart city ROI often means having to measure a wide array of KPIs and KPIs that are particularly difficult to measure. Despite these challenges, enough case studies exist to form a general set of best practices for the measurement of Smart City ROI.
What Smart Cities Do Right
Smart city projects use Internet of Things (IoT)-enabled technologies and data integration platforms to monitor, control, and optimize everything from public transportation to energy to water. They provide countless unique opportunities to lower costs and even generate new revenue streams. The most significant value proposition, however, is the potential to attract and retain valuable city residents.
The Worldwide Semiannual Smart Cities Spending Guide, developed by the International Data Corporation, estimates that smart city investments will reach $158 billion by 2022. The United States is currently the largest market for these initiatives, spending over $23 billion in 2018 alone. It’s clear from these numbers that smart city solutions are in high demand, but the return on investment (ROI) for these projects often remains unclear. Many initiatives are still in the early stages of development, and their primary benefits may lie in intangible areas that are difficult to measure in dollars and cents.
With stringent government requirements and investors demanding hard numbers, it can be a challenge to acquire funding for smart city projects. Yet urban centers resistant to smart city technologies are likely to stagnate and lose their competitive edge. It’s therefore essential to translate the benefits of smart city projects into measurable returns in order to convince city officials, citizens, and other stakeholders that they’re worth investing in.
Funding for Smart Cities
In a survey of European IT decision-makers, funding was cited as the third most significant barrier to the development of smart cities. However, 78% of those surveyed expect to have the necessary budget to undertake an initiative by 2019. To achieve this, cities need to develop comprehensive business models that both meet government requirements and also appeal to private investors.
In the past, cities have relied on the public sector for funding, with governmental organizations paying to build and operate new services. The other option — and an increasingly viable one at that — is to sell value generated by the initiative to a third party. This might include monetizing data collected or selling advertising space. Private-sector funding is also an option, but in these cases, cities must demonstrate an acceptable ROI or appeal to the philanthropic goals of impact-driven investors.
The most feasible solution, however, is for cities to collect funds from a combination of public and private sources. Public-Private Partnerships (PPPs), in which a contract between the government and business(es) in the private sector establish grounds for the provision of a service, have proven most effective. In these instances, a city will likely allow a private business to upgrade and manage public infrastructure. PPP funding for a smart city project might include a company leasing parking meters from the city, replacing them, and then collecting fees from the new meters.
Once cities begin to look beyond initial funding and cost saving benefits, planners can begin to envision how to generate revenue from smart city initiatives. IoT technologies carry tremendous opportunities for monetization. In fact, smart city parking alone could result in revenue increase of between 10-35%.
To Prove ROI, Start Small
One effective way to drive value early in the development process is to start with a small, contained area like one building or street. By measuring data from this project, city planners will be able to determine what works and what doesn’t. In addition, if significant savings are generated, the city could reinvest them in further infrastructure development.
Toni Oubari, the manager of Smart Communities at Verizon, believes that digital lighting is an effective way for cities to begin implementing smart technology. The technology is ready to use today and offers the chance to save on energy costs without the need to invest in massive rebuilding.
The execution of smart lighting is also relatively straightforward. When a city is ready to replace a few hundred street lights in one area, officials could install connected lamp posts that can be centrally managed. This technology could cut down on energy costs, add network density, and create a platform for additional IoT solutions like traffic monitoring or public WiFi.
This strategy has already been leveraged in both Atlanta, Georgia and Nice, France. In Atlanta, the city is working with AT&T, GE, municipal leaders, and utility provider Georgia Power to install 1,000 wirelessly-controlled LED lights. In Nice, city planners installed smart lighting on one boulevard, where they adjusted street light intensity based on pedestrian and vehicle traffic patterns as well as real-time weather conditions. The city is expected to save between 20-80% in electricity costs.
As smart lighting is one of the most effective updates a city can make, it has the potential to reduce the cost of energy by 70-75%. Studies estimate that most cities could save 50% on energy bills simply by switching to LED bulbs.
How to Measure Smart City ROI
To attract new investors and ensure smart city projects translate to positive outcomes, it’s essential to identify both immediate and long-term benefits of smart city initiatives. By measuring key performance indicators (KPIs), city planners can evaluate how well challenges are being addressed and determine if the project is achieving what it set out to do. The process should look to identify both gaps in development and opportunities for further innovation.
There are a variety of ways to determine smart city ROI. These include cost-benefit analysis, before-after assessments, audits, and technical monitoring. However, instead of focusing exclusively on quantitative data, the assessment should also include qualitative measures that take into account the satisfaction of citizens.
According to the Journal of Urban Design, there are two major models for measuring the success of smart cities. The first — the Smart City Maturity (SCM) Model — is a comparative tool that identifies where a smart city is in terms of its stage of development. Ad hoc project planning marks the least mature phase, while “optimized” describes the most mature phase, characterized by fully connected city-wide systems.
The Smart City Reference (SCR) Model, on the other hand, measures KPIs corresponding to smart city layers, or stages. This model is designed to identify areas for innovation to support urban development, such as integrated ICT infrastructure. Each city layer is associated with different types of development and measured with different KPIs.
A study conducted by Siemens and Arup presents another methodology for measuring ROI on smart city infrastructure. The system is based on an analysis of five European cities: London, Brussels, Aberdeen, Alba Iulia, and Istanbul. It measures the success of six different sectors — energy, transportation, buildings, security, harbors, and connectivity — through cost-benefit assessments, as well as less tangible aspects such as improvements in public health and lower crime rates.
The projected benefits of smart cities could revolutionize the functionality and livability of urban centers. A report by the McKinsey Global Institute found that IoT and other smart city technology could have a positive impact on diverse issue areas such as crime, traffic, and sustainability.
The McKinsey report suggests that cities using smart technology could substantially reduce crime and improve emergency services. Incidents of assault, robbery, and burglary could be lowered by 30-40%, while optimized dispatching and synchronized traffic lights could reduce emergency response times by 20-35%. Smart city initiatives could also reduce the number of fatalities from homicide, car accidents, and fires by 8-10%, cut carbon emissions by 10-15%, water consumption by 20-30%, and volume of solid waste per capita by 10-20%.
The Siemens and Arup study found several specific areas where the five focus cities could lower costs and increase public safety. East London’s “Arc of Opportunity” energy development plan, for example, would incorporate virtual power plants and smart meters to generate a digital dividend of €304m ($345m) over 35 years. The city of Brussels, meanwhile, could save 8% of police costs — €30m ($34m)— by using data from surveillance cameras for predictive policing. Kartal, a suburb of Istanbul, served as another interesting case study. It was estimated that smart sensors for energy management and earthquake detection would result in a five-year payoff, with potential lifetime returns of 24:1.
When Smart Cities Succeed
82% of respondents in a survey of IT decision-makers reported that they believe smart city technology will help improve safety and reduce crime. Private investors also recognize the tremendous value to be had, with 78% of those surveyed saying that there is a business case for investing in infrastructure updates.
Smart cities around the world are already seeing substantial gains in areas from energy cost reduction to quality of life. In Moscow, 20,000 traffic sensors helped cut travel times by 25% with an ROI of under two months. An electric car-sharing program in Paris and 46 nearby cities reduced transportation costs by about 90% annually. This program, called Syndicat Mixte Autolib, has cut 1.5 metric tons of carbon dioxide emissions per year and replaced 25,000 private vehicles.
Cities with a mix of different businesses and industrial sectors stand to benefit the most from smart city integration. Of the 50 U.S. cities with the most to gain from smart city technology, Boston tops the list, followed by Chicago, Atlanta, Philadelphia, and Austin.
Around the world, cities of all sizes are wrestling with the issue of how to allocate shrinking budgets for maximum returns. Key to informing these critical decisions is the equally challenging issue of measuring ROI across a vast array of programs. All too often, the initiatives with the most measurable ROI receive the funding — rather than those with the greatest potential returns. Ultimately, the onus is upon city planners and their partners in the public and private sectors to design methodologies that accurately capture Smart City ROI — those who do will reap the rewards.
Download our White Paper How to Measure Smart City ROI to learn more about how municipalities can leverage best practices for evaluating the success of intelligent infrastructure projects.