Can P3s Jumpstart Smart Cities?
While the intricacies of public-private partnerships can be tough to navigate, they have been successful in helping cities build the kind of digital infrastructure that’s necessary for today’s urban economy and society.
Reinventing a city is a challenge and a feat of such immense proportion that it can rival building a new city from the ground up. It requires no less than rethinking and rearchitecting everything that worked decades or centuries ago, for both present and future needs.
That’s why public-private partnerships, or P3s, are enjoying a renaissance. They provide a real, practical solution to cities’ most pressing problems. P3s are nothing new: Two of the most successful and most celebrated developments in U.S. history — the Erie Canal and the Transcontinental Railroad — date back to pioneering P3s of the 19th century. In one assessment, the Erie Canal was said to provide “a model of public-private partnerships that endure to this day.”
Today’s model for P3s is much the same as it was back then, but now is the engine behind the development and emergence of smart cities. At its heart, it’s a simple alliance between government and private entities to achieve a common purpose, and a purpose that neither entity could be expected to achieve alone. In fact, P3s are being tested for their resilience as cities address their toughest challenges.
One successful project, led by the Dallas Innovation Alliance, was built by “a network of three dozen partners across the public, private, civic and academic sectors and over 20 city departments.” The effort is now paying off. In the month of July 2018, the alliance’s Smart Cities Living Lab reported energy savings on 4,611.28 kilowatt-hours from improvements in street lighting — a benefit of the city’s partnership with Philips Lighting.
ADDRESSING THE LIMITS OF GOVERNMENT FUNDING
Today, the challenges of the P3 model are driven by several converging forces:
Approximately 3 million people worldwide move to cities every week.
This influx has resulted in severe pressure on cities’ infrastructure, reduced quality of life, and negative effects on health and personal safety.
Global economic momentum and renewed interest in the industrial market by large technical and communication companies are driving an emergence of many new technologies and solutions for smart cities.
Many of these solutions have not yet been deployed widely enough to accurately demonstrate their viability or ROI.
P3s address the issue of the limited government-sponsored funding most cities must achieve for a major transformation of their infrastructure. In fact, Deloitte estimated that just 16 percent of cities can self-fund required infrastructure projects.
The goal of P3s is a lofty one: to create sweeping infrastructure transformation by taking the technical, financial and operational risks and distributing them optimally between public- and private-sector partners. This not only ensures the viability of the transformation, but also that each entity is doing its part and all risks (design, construction, availability, demand, operational/maintenance, residual value and financing) are addressed upfront and minimized along the way.
While successful P3 initiatives have been those that solve a breadth of challenges, reaching an agreement on funding and cost recovery is often the make-or-break decision, especially when the roles of the partners remain fluid. It’s easy to say the role of the public partner (the city) is to articulate the problem and challenges the city faces, and the private partner takes the role of defining and developing the technology, as well as accelerating its deployment.
But it goes much deeper: Private and public partners must work as a team to address social and environmental challenges. Those are often harder to address because they are harder to quantify and therefore measure.
Ultimately, the sheer scope of many P3-based transformations is the greatest challenge. In Cleveland’s P3-based Waterfront Initiative, the partners in the initiative included “the city of Cleveland; the Port Authority; the Ohio Department of Transportation; the business community, represented by the regional chamber of commerce; and the neighborhoods, represented by the non-profit association Cleveland Neighborhood Development Corporation.”
Defining the roles of multiple partners and forging agreements among them can stall progress and inject delays into schedules, but those setbacks are never inevitable. The five partners in the Cleveland Waterfront Initiative report their relationship “was formalized through a memorandum of understanding that identified each partner’s roles and established consensus on the redevelopment framework principles and strategies.”
ROI ABOVE ALL
While funding is a significant challenge, it has already proven to be the linchpin in helping many technologies — which is a driver of dramatic change — take root in cities. And P3s can’t afford to underestimate the challenge of developing a revenue model that will meet the expectations and requirements of the collaborating P3 entities. Nor can they predict how much time can be lost in reaching accord between the parties. Lost time and lost productivity play a big role in determining ROI.
Still, a murky business case or unwarranted assumptions about the potential ROI of an infrastructure transformation initiative can doom the P3 before it breaks ground. Just as problematical, says Ryan Citron, senior research analyst at Navigant Research, is that many use cases for infrastructure transformation are still untested, or that they “offer only a ‘soft’ ROI.”
That’s why P3s often pursue their goal of transformation in stages, focusing first on deploying proven applications, such as high-ROI smart streetlights and smart meters, in the first stage, which allows the market more time to mature the business case of the next wave of solutions.
It is the responsibility of vendors from the private sector to understand this focus and deliver not just technology, but also a well-defined business case and ROI projection customized for every project.
And how do new P3s identify and prioritize applications that will bring the greatest ROI, while protecting both ratepayer and taxpayer interests? They look to the successes of pioneers, knowing simulations are just that: they exist in plans and spreadsheets, but not in real life. Clearly, P3s face myriad challenges. But consider, in many successful P3s across industries, no other model could have achieved the same immense transformation and improvements as a P3.