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Smart Cities Infrastructure: A Catalyst for Smart Revenue Sharing?

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization. 

By Daniel G. Bauer
February 24, 2019

Oftentimes, discourse regarding lack of emphasis on infrastructure seems mundane and repetitive. Opinions abound regarding the range of capital expenditure. Infrastructure across the board has depreciated way beyond its lifecycle. However, the one common denominator reigning supreme singularly focuses on the critical level of need for infrastructure improvements. Yet action on infrastructure remains in a state of limbo, and the singularly focused concern of need continues to be both misaligned as well as elusive. Action going forward, such how the narrative is shaped, is consistently bogged down in traditional vs. innovative ways of funding and financing. In this ongoing infrastructure series, this article focuses on the Smart Cities concept as the potential mechanism for revenue sharing, which may serve as an opportunity to trigger funding and financing of all types of infrastructure both domestically and abroad.

The Smart Cities concept started gaining traction 20 years ago, coinciding with technology advances involving both information communications technologies and interest in renewable energy and resources. In 2012, Hafedh Chourabi and a group of fellow academics provided a framework for the emerging concept of Smart Cities. The Smart Cities framework was triggered by a much needed response to the increasing trend of substantial population growth in urban centers and cities. This increasing trend is disconcerting and forecasted to continue. It will effectively put a strain on cities’ current and future service levels, heightening intermediate and longer term concerns regarding sustainability. The 2012 publication, Understanding Smart Cities: An Integrative Framework, researched the extant literature emanating from various disciplines such as e-government, information science, urban planning and public administration.

Chourabi et al listed various challenges contributing to an emerging definition of Smart Cities. These challenges (or difficulties) included the following:

* Waste management.

* Scarcity of resources.

* Air pollution.

* Human health concerns.

* Traffic congestion.

* Inadequate, deteriorating and aging infrastructure.

Additionally, the authors posited a set of social and organizational problems emanating from, “Multiple and diverse stakeholders, high levels of interdependence, competing objectives and values and social and political complexities.” In a prior article in this ongoing series on infrastructure, published in 2017, the culmination of these challenges coupled with financial constraints has led to the categorization of infrastructure as a wicked problem. Once again though, where there lies difficulty or a problem, a window of opportunity presents itself.

The underlying common denominator interconnecting all the aforementioned challenges, such as traffic congestion, waste management, air pollution and others, is still infrastructure. Fundamentally, mechanisms contributing to the success of infrastructure projects consist of aligning risk and return, satisfying either public interests, private interests, or public sector-private sector interests. The challenge lies in the fact that risk management is primarily the driver. Risk in the form of uncertainty and information asymmetry contribute to a higher degree of difficulty experienced by infrastructure projects. Therefore, the challenge is embedded in the demonstration of overall cost effectiveness through savings, and allowance for the presence of efficiencies, outweighing lower cost financing through traditional procurement. Once again, determining and monitoring the presence and level of efficiency is paramount to the success of infrastructure projects. Non-traditional innovative methods of securing funding and attracting financing may not necessarily consider future revenue sharing. In some circles, revenue sharing is viewed as somewhat antithetical by traditionalists both in the business sector and the public sector aisles. Furthermore, the concept of Smart Cities is relatively nascent and seemingly complex considering the menu of challenges and presence of a multitude of various groups of actors.

The widest potential appeal amongst various constituents in a community or city may be the Smart Cities concept. The reason for such a broad appeal is that the concept of Smart Cities relies on interconnecting infrastructure of all types and uses. Smart Cities infrastructure touches upon all the daily activities and machinations comprising a city’s businesses, public services and society. If Smart Cities infrastructure touches upon a city’s daily activities, is there a requisite smart opportunity for shared revenue?

However, a general consensus has been building that supports revenue sharing infrastructure models. Financial constraints may be serving as the impetus for revenue sharing arrangements, invoking the English language proverb, “Necessity is the mother of invention.” In order for communities to be smart communities, governments must also be innovative. Governments that are innovative stress changes in policies, as J.N. Enger and A. Maggipinto pointed out in their 2010 publication, Technology as a Tool of Transformation: e-Cities and the Rule of Law. Furthermore, viewing smart governments through a pragmatic lens, both authors posited that a government cannot innovate without a, “Normative drive addressed in public policy.” Notwithstanding the foregoing, certain states such as Texas and New Jersey, as well as here in Florida, have proceeded forward and followed the innovative path. In these states, various types of revenue sharing arrangements have already been enabled via the legislative process.

Contributing to the exploratory initiatives regarding revenue sharing in 2015, the U.S. Treasury Department’s Office of Economic Policy identified three alternative, non-traditional methods of funding and financing infrastructure projects via the public-private partnership framework. The report, Expanding the Market for Infrastructure PPPs – Alternative Risk and Profit Sharing approaches to align Sponsor and Investor Interests,  presented the following three methods:

> Rate of Return.                         
> Price Cap.                               
> Sharing.

The underlying principles for all three models is culled from the regulatory environment of private sector energy and telecommunications utilities infrastructure. The principles were applied to user fee public-private partnership projects. In general, infrastructure investments are dependent upon either tax revenues, user fees or a combination thereof. Moreover, community and political support are mandatory for expanding infrastructure of all kinds ranging from energy, transportation and residential housing to commercial properties and buildings and social infrastructure such as schools, hospitals, seaports and airports.

Revenue sharing models, in particular, accomplish several mutually beneficial goals and objectives including, but not limited to, the following:

  1. Retaining the private sector participant’s financial incentive(s) while aligning public sector interests and investor interests.
  2. Insulating the project sponsor and local stakeholder(s) against underestimation of demand. (Maybe community members don’t use the infrastructure type).
  3. Insulating the project sponsor and local stakeholder(s) from substantial rate increases sought by the private sector participant
  4. Receiving revenue that the government can deploy to make other investments, lower taxes, or extinguish debt if demand is much higher than expected.
  5. Mitigating private sector participant’s future risk by reducing the government’s incentive to renegotiate.

Implementing Smart Cities infrastructure presents a window of opportunity for business, government and society fully engage in the process of establishing public policy, seeking collaborative modes of service offerings to users and discovering non-traditional means of funding and financing long-term infrastructure. By committing to infrastructure revenue sharing innovation, the public sector engages the community and welcomes private sector participation. Smart Cities infrastructure can maximize the value of local public goods, thereby establishing a precedent for various revenue sharing arrangements ranging from land development and construction management to long-term maintenance contracts, ultimately appealing to both the private sector and the public sector.

Author:Daniel G. Bauer is finishing his Doctorate at the School of Public Administration at Florida Atlantic University. Mr. Bauer, formerly Managing Director of the Public Procurement Research Center, has an Executive MBA from the College of Business at Florida Atlantic University and a BBA in Finance from University of Toledo College of Business. Daniel has 20+ years of professional experience in both telecommunications and energy renewables domestically and abroad. His research areas focus on finding solutions at the confluence of financing, procurement/supply chain, organizational behavior, sustainability, and social responsibility. Please reach out to him at [email protected]

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