Camden Advisory

PPPs and smart infrastructure

What are smart infrastructure and smart cities?

Smart infrastructure is no longer just a buzzword but an operational reality. This has been made possible by technological advances in recent years in areas such as data collection processes, data treatment (artificial intelligence) and communication networks which are all part of the internet of things (IoT). 

According to the Royal Academy of Engineering of the United Kingdom, “A smart infrastructure is a smart system that uses a data feedback loop to improve decision-making regarding a matter. A system that can monitor, measure, analyze, communicate and act based on data collected by sensors.”

Based on the definition, the Royal Academy makes a distinction between semi-intelligent infrastructure (data is collected but the system does not make any decision ; typical example would be city traffic map); intelligent infrastructure ( data is collected and support human decision process; for example, traffic information is provided to the drivers to help them adapt their itineraries); and smart infrastructure (data is collected based on which the system takes decision autonomously). Typical examples of smart infrastructures are smart networks (for example an energy transmission network) or smart buildings (when operations such as heating, lighting or security are handled by automated systems).

Why the global surge of interest in smart infrastructure?

According to Nexus, the benefits are:

  • Self control
  • Cost efficiency
  • Reliability
  • Safety and resilience
  • User interaction and empowerment
  • Sustainability

Compared to traditional infrastructure, smart infrastructure is able to adapt to the changing needs and changing environment, to communicate individual knowledge to the network and to optimize the decision-making process in a way the human mind alone would not be able to achieve.

To succeed smart infrastructure should not be exclusively designed by engineers for technological benefits; on the contrary, it should be a tool to support cities master plans and long-term objectives for the benefits of all stakeholders (such as users, citizens, NGOs, service providers, City government and others).

More comprehensively smart infrastructure is part of a global move toward a more interconnected society. This includes trends such as e-government, e-governance, social inclusion, distance services and smart economies  . In this sense, smart infrastructure is related to smart mobility (transportation networks with real time monitoring and control systems), smart environment (pollution control), smart services, smart governance (use of technology for design and delivery of services), smart people (creativity and innovation), smart living (improved quality of life), and smart economy (economic growth through technology).

The Smart Cities Council considers that smart infrastructure shall help cities to embody three core values: livability, workability, sustainability. This council led by private firms such as IBM or Huewei is a good example of the commitment of the private sector to support the move toward smart cities by providing technical advisory services and spreading best practices to the cities governing bodies.

According to a report of economic consultants, the global smart cities market size was valued at USD 98.15 billion in 2020 and is expected to expand at a compound annual growth rate (CAGR) of 29.3% from 2021 to 2028.

What PPPs for smart infrastructure?

PPPs being a method for delivery of infrastructure, they can be implemented with any type of infrastructure. The smart factor from the strict PPP point of view does not require any revolution in the concept of PPPs. In On the other hand, it is important to determine in which context and under which conditions PPPs are best suited to deliver smart infrastructure.

The traditional arguments in favour of PPPs remain true with regards to smart infrastructure: when adequately designed and implemented, PPPs allow to alleviate financing constraints, transfer risks to the parties best suited to bear them, take advantage of private sector know-how and skills to reduce cost and delays and improve quality.

However, a particular emphasis should be paid to certain areas when talking of smart infrastructure. The specificity of the ICT is the extremely quick pace of technological change. When a road or a power plant can operate over decades with minimal requirement in maintenance, an ICT system is due to become outdated in a short timeframe.  Obviously, technology firms are in a better position than the public sector to mobilize, fine tune and implement technology.

 Cities need to understand the drivers of technological change as well as the gains and limitations of an intensive use of technology.

Contracts should focus on the results that are targeted rather than on a precise description of the means and the equipment to be implemented. Although the result-oriented mindset is a tendency of recent PPPs, this approach is vital in smart infrastructure projects. For one because cities may not have the expertise to assess by themselves the best technical solutions, and for two because the pace of change will render obsolete in the future the technical solutions that may appear best at one point of time.

For this reason, PPP contracts should emphasis emphasize flexibility and make sure that the private partner will be able to adapt the technical solutions with time. Contractual incentives, particularly in terms of remuneration, should guarantee that the private partner will constantly monitor market developments and envisage the deployment of innovation when it makes sense under all dimensions (users point of view, commercially, financially, etc.).  In this context of constant change and adaptation, a cooperative approach based on mutual trust between the city (including other stakeholders such as NGOs and users’ representatives) and the private partner becomes crucial to success. 

Different types of PPPs may be structured in relation with to smart cities. The traditional model based on project finance, with the creation of a Special Purpose Vehicle that receives either payment from users or from the public Partner are to be considered when the project involves investment into assets that are clearly identified as well as the cash-flows associated with them. It allows for the mobilization of private funding and a strong transfer of risk. Besides this traditional model, the revenue sharing model is growing in popularity. Under this scheme, an ICT vendor implements a technological solution for a City and is repaid through the cost savings generated by the solution until the vendor has achieved pay-back, including a profit rate agreed in advance.

According to Paul Jacobson, PPPs should be examined under 2 axes: the revenue earning capacity, and the capex. The sweet spot for PPPs is formed by projects with high revenue potential and high capex. On the opposite, projects with low revenue generation and low or medium capex should rather be procured by means of EPC contract followed by a service contract if necessary.

In practice, as analyzed by McKinsey, a considerable number of smart cities projects have already benefitted from PPP contracts, especially in fields such as:  energy management (distribution and grid, metering, street lighting, energy efficient buildings), network infrastructure, transport (car and bikes pooling, integrated multi-modal transport, etc.), traffic management systems, utilities management, CCTV and surveillance, as well as e-governance. This list will no doubt grow in the coming years.

Smart infrastructure has become a key component of the future of large and small cities at the global scale. PPPs are without  doubt one of the best available instruments to design, finance, build and operate it to the benefits of all citizens as the expertise and creativity of private sector in this specific area is acknowledged by all and largely unrivaled.

 

 

 

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