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Governments explore new ways to finance smart city projects

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Smart city projects are being executed through partnerships between government agencies and private investors, according to a recent study

Governments are exploring revenue sources to finance smart cities given the high amount of financial resources needed to implement smart city projects, according to a recent study by Frost & Sullivan.

The report also highlighted how governments are partnering with financial intermediaries and private investors in order to execute smart city projects.

According to Frost & Sullivan, the global smart city market could expand to $1.5 trillion by 2020 and prove to be one of the biggest investment areas for private investors and institutions. The public sector will also look to new mechanisms to distribute funds to various smart city projects and, ultimately, earn revenue from those projects, according to the report.

“Stakeholders will be able to choose from a multitude of financing mechanisms, and each financial mechanism has a unique selling point in terms of infrastructure funding,” said Frost & Sullivan visionary innovation research analyst Yash Mukherjee. “Project initiators will need to analyze the best-fit mechanism based on risk appetite, size of investment, duration of financing and tax implications. They will also benefit greatly from collaborating with financial intermediaries, as they securitize the cost of capital and distribute risks among investors.”

“In developing countries, stakeholders in smart city development often resort to direct financing through government allocation or international grants. However, international grants and financing are dependent on political and economic stability,” said Mukherjee. “To attract foreign funding, which often is complemented by transfer of technology and expertise, local governments must focus on their ease-of-doing-business indicators.”

Frost & Sullivan also highlighted that participants in developed economies rely more on revenue-based financing models to build infrastructure. Stakeholders from developed and developing markets have found great value in adopting the public and private partnership scheme, even though the terms of the agreement may vary according to the region, according to the study.

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