The majority of the world’s population already lives in cities – 55 percent, according to the United Nations – and that figure is set to rise further over the coming decades, reaching 68 percent by 2050. This trend, combined with the push for net zero and the rapid uptake of digital technologies, has led to the concept of smart cities, in which municipalities manage traffic, transport, street lighting, waste collection and other public services using connected grids and sensors to increase efficiency and reduce energy consumption.

The OECD defines smart cities as “initiatives or approaches that effectively leverage digitalisation to boost citizen well-being and deliver more efficient and inclusive urban services and environments as part of a collaborative, multi-stakeholder process”.

Digital infrastructure, from high-speed internet access and data centres through to cloud-based systems and 5G networks, is the primary means of connecting municipalities and their services to citizens. Infrastructure investors worldwide have funded these changes for some time, but how much of their investments are directed towards the creation of genuinely smart cities?

Patrizia clearly sees opportunity here. Last year, it acquired Whitehelm Capital, which has a dedicated €750 million Smart City Infrastructure Fund, to complement its real estate capabilities and build out its global presence. “Smart cities offer a lot of very exciting opportunities,” says Phoebe Smith, senior director at Patrizia Infrastructure. “There is a real crossover between real estate and infrastructure here.”

Whitehelm began looking at smart cities in 2018, attracting capital from pension fund APG as the fund’s sole investor. The fund’s investment areas have shifted somewhat since then. “Originally, we had thought the fund would focus on specific areas, such as street lighting,” recalls Smith. “We had thought there would be a lot of PPP-type opportunities in using the energy savings from conversion to LED lighting and applying this to other solutions. We are still investors in this, but we have found that our most successful investments to date have been in partnership with SiFi Networks in the US.”

The fund is investing up to $450 million in the privately owned telecom business SiFi to roll out high-speed internet access in Tier 2 cities in the US. “We now have partnerships with SiFi and the cities themselves,” says Smith. “We’re all incentivised to make it successful from a smart cities perspective, and we’ve worked closely with the parties from the early stages to understand what the cities need and what problems they are trying to solve. In one city, for example, it’s flood monitoring, while in another, it’s easing traffic congestion.”

The Asian Infrastructure Investment Bank (AIIB) is another investor heavily involved in smart city enablement. With a mandate of financing infrastructure for tomorrow, the multilateral development bank views smart cities as an integral part of its sustainable cities investment strategy.

“As a theme, this allows us to connect a broad urban agenda to technology-enabled infrastructure and green infrastructure,” explains Ping Yean Cheah, senior strategy officer (urban) in AIIB’s strategy, policy and budget department. “As more Asian cities become engines of economic growth and hubs of trade, infrastructure will be a key contributor for ensuring the green development, connectivity, productivity, efficiency and overall competitiveness of these cities.”

While many of AIIB’s investments include other infrastructure types, digital capability is an important element in its approach to development. Last year, for example, together with the World Bank, it agreed to help finance the urban upgrade of the Chennai metropolitan area, in India. Water supply and sewage treatment infrastructure are part of the plan, but so is digital infrastructure and connectivity.

These latter elements are also integral to AIIB’s investment in the Liaoning Green Smart Public Transport Demonstration Project, which will bring battery-powered buses to five Chinese cities alongside smart public transport management systems.

Working together

Successful delivery of such projects requires strong partnerships with local governments and a coordinated approach to solving urban issues. “Instead of looking at a series of separated infrastructure projects in one urban area, such as a power generation project, a data centre or urban mobility,” explains Cheah, “we look at one approach or project that links all these various sub-projects, while focusing on a higher objective. This could be optimising power generation and distribution to lower the carbon footprint, for example.”

While this ambition is perfectly suited to investors with a development mandate – such as AIIB – private funds necessarily have to take a smaller-scale approach. It is also true that many of the smart city initiatives in regions such as Asia are for new developments or for redeveloping run-down cities, which means that projects often start with a blank sheet of paper as opposed to overlaying smart deployment on urban centres.

Yet even in these cases, there are issues. “In smart cities, when we merge the technology-driven infrastructure with sound urban physical, communal and climate planning, the breadth and depth of working with partners are at a new level,” says Cheah. “The multi-dimensional challenge of integrating the needs of various stakeholders makes it more challenging than plain vanilla infrastructure investment.”

In more developed economies, creating smart cities can be even more problematic because local governments, planners, developers and investors are retrofitting existing infrastructure or are having to manage multiple relationships across different departments and stakeholders, which often have differing agendas. After all, while rolling out digital infrastructure is part of the process of creating smart cities, project design and execution need to consider the types of issues that local governments want to solve through smart solutions to ensure that all changes are fit for purpose.

The abandoned Sidewalk Toronto project, a collaboration between Ontario Teachers’ Pension Plan and the Alphabet-owned company Sidewalk Labs, demonstrates the difficulties of managing these relationships. The initiative aimed to create a neighbourhood that was affordable, green and powered by Internet of Things (IoT) data collection, analysis and application in areas such as energy efficiency, street and road usage.

Yet the project faltered, partly as a result of the pandemic, but also because of privacy concerns – key stakeholders, including city residents, were not brought along in the process.

Some way to go

The other problem is that there is not yet a workable framework to develop smart cities. “The issue with the smart city concept,” says Atul Roy, telecoms advisor for Cordiant, “is that the technology is there, but the systems aren’t. We’ve seen a massive adoption of digital ways of doing things as a result of covid, yet there isn’t a consistent smart city framework to pull all the elements together.”

Some city councils are leading the way, including those of Bristol and London, he says. But not all cities require the same solutions. Roy takes 5G rollout as an example. “You could reach a city from two or three big towers, but it won’t provide full coverage, so smart city boxes are often a better alternative,” he says. “Yet in Westminster, for example, the council wants the boxes to be the same colour as the lampposts; in Milton Keynes, the requirements are different.” It is a small example, but it highlights the often-fragmented nature of smart city opportunities.

“Smart city-related infrastructure is very interesting because it’s a condensed version of all the things we do as infrastructure investors, with the exception of ports and shipping,” says Harold d’Hauteville, head of infrastructure equity, Europe, at DWS. “Digital infrastructure is combined with energy efficiency, mobility and social infrastructure. However, it’s challenging because there are so many segments interacting. Which counterparty takes the lead? How do you work with so many stakeholders when you might have, for example, a utility, a car park provider and a municipality?”

The Stadtwerke model in Germany, where municipalities have traditionally operated utilities and networks, including fibre and digital infrastructure as well as more traditional local government services such as traffic management and transport, could offer opportunities, adds d’Hauteville.

Otherwise, he says, it is a question of starting with traditional infrastructure assets and thinking creatively about how they can be adapted to future needs. “Clearly, that means laying the fibre network and investing in data centres, where the trend is to bring them closer to the action,” he says. “But it also means investment in areas such as transportation and inter-modality. If you have a bus depot, for example, it can also be used for other things, such as charging and delivery storage.”

On that point, Anish Butani, senior director at bfinance, asks: “There’s a lot of excitement around smart cities, but are there opportunities at scale?”

He continues: “We’re still getting fibre and 5G rolled out and so there are infrastructure investment opportunities there, and you could start rolling out IoT once that phase is completed. But the issues that many municipalities want solutions to, and where infrastructure investors are already investing – such as circularity, energy transition and waste management – are far from integrated currently.”

Integrating with technology

This may change over time, but there is still some way to go. As a result, some are looking at the technology opportunities alongside infrastructure. InfraVia Capital, for example, is investing in areas such as fibre-to-the-home as infrastructure investments, and also has a growth-stage fund that focuses on technology.

“We see more opportunities in the technology space when it comes to smart cities,” explains Bruno Candès, partner at InfraVia. “On paper, there is the potential to invest in smart grids and to decarbonise mobility, but we’ve yet to see any real, transactable investments of scale in smart cities. There are too many questions around data ownership and the difficulty of interacting at a local government level. The connectivity and private networks required to make this work are already in infrastructure portfolios, but the use of data to move traffic around and so on is several steps behind.”

Smart cities as a concept can generate a lot of excitement as a way of living, working and moving around more sustainably and efficiently. There are plenty of investment opportunities in the market that can contribute to making this a reality, from the building blocks of fibre connections and 5G through to making smarter use of traditional infrastructure assets. The issue is that the broader environment hasn’t quite caught up – at least, not yet.

“If we look at where municipality finance is today, especially post-covid, it seems likely many will need to think radically about how they finance development in future,” says Butani. “It may lead to better frameworks for public-private collaboration to innovate and deploy the smart concept across cities.”

Cheah agrees. “We expect there to be more prospective planning around how to shape the world’s future cities and how to retrofit existing ones,” he says. “Part of that will be a more systematic approach in integrating tech into common infrastructure to make urban centres more efficient, resilient and eco-friendly. In the meantime, we expect infratech and digital infrastructure investment opportunities to grow in the short to medium term.”

A combined approach

Integrating a range of smart services is one of the key issues for municipalities, and can be a major barrier to making smart cities a reality.

Patrizia Infrastructure believes that one of its portfolio companies may have an answer to this. 

In 2020, the firm invested in Connexin, a fixed wireless access (FWA) network provider to 5,000 customers, most of whom are based in Hull, England. The company also has a second division, which offers IoT services to city councils and water utilities companies. 

“The fibre division of Connexin offered us enough of the infrastructure characteristics that we look for in an investment, and the IoT part of the business is really exciting because it is capable of solving a lot of issues for local government,” says Patrizia’s Phoebe Smith.

It provides what Smith refers to as “a single pane of glass”, so that customers can see their data collected from sensors across a range of services, such as water, parking, lighting and waste, then respond appropriately. It is modular, but it can also help integrate systems from the different services that a local authority provides to its residents. 

“What’s exciting about this is that it can do this with data from any source, and that it is flexible. So you might start with one area, such as smart parking, then add use cases and you go along, so you can add smart waste collection or street lighting,” says Smith.