Smart City – What Are the Business Models?

Frost & Sullivan suggested 4 Smart City Business Models. [Source: “Global Smart City Market”, 2013]

1. Build Own Operate (BOO) – The smart city planner independently builds the city infrastructure and delivers smart city services. The operation and maintenance of the services are fully under the planner’s control
2. Build Operate Transfer (BOT) – The smart city planner appoints, a trusted partner to build the city infrastructure and provide smart city services for a particular area within a period. After completion, the operation is handover to the smart city planner.
3. Open Business Model (OPM)– The city planner allows any qualified company or business organization to build city infrastructure and provide city services. The city planner, however, will impose some regulatory obligations.
4. Build Operate Manage (BOM) – The smart city planner appoints a trusted partner to develop city infrastructure and services. The partner operates and manages the smart city services. The city planner has no role further. Most of the public-private partnerships are build on this model.

Sometimes the dilemma is in the scale of deployment. It’s good to start small, but the impact will not be as effective. It’s also good to deploy big time but the cost can be unbearable, and the risk can be high. Technology moves too fast and can make infrastructure obsolete before getting the ROI.

To help government leaders find the resources and make an investment in a pilot project, it is recommended:

• Educate key decision makers and build support.
• Use success stories from other cities and vendor ROI and other performance metrics to make the business case.
• Aim for investment in discrete point solutions as pilots.
• Find key private sector and university partners.

Depending on the economic, readiness, complexity and probably culture of a country, the business model can vary between one country and the other. We have a fascinating discussion (please join the discussion) in this Forum which posed the question “Who Pays for Smart Cities Initiatives?”.

We want to see how the investment on Smart Cities pays by itself. It’s excellent and fortunate when Government have the vision and allocate funds for smart cities trials. What if they don’t? How do we start such initiatives?

Here’re some of the comments from the members:

1. Another contentious issue with smart cities is the ownership and privacy of data! [Chandramouli Venkatanarayan]
2. At the end of the day, consumers/citizens, are the ones who pay( or save ) [Janis Vinters]
3. In cases when municipality doesn’t have funds to invest in savings –
4. Here in Europe popular are ESCO projects, when customer pays difference between they ‘’old’’ Bill and ‘’new ‘’bill till investment is paid back (more popular is they pay 90% from old bill, as wit this method they start to save from first day). In this case, all are winners(kind of) Municipality don’t need to allocate money, citizens don’t need use they money, but after some years after the investment is paid back they start to pay lower bills and installed systems (or anything else) becomes they property. [Janis Vinters]
5. If the industry could take a minute and stop talking about Smart Cities and qualify, quantify what they had to offer and the added value, then the economic case for implementation would be so much easier for us all. Oh, if the current model doesn’t work, fix it! [Charles Sellers]
6. Smart City solutions need to provide a quantifiable benefit in sustainability, efficiency, safety and overall quality of life. Therefore, they need a realistic ROI and break even period. [Brad Gleeson]
7. Don’t forget the value with information technology is making sure you do something with the information! Smart Cities need to divorce the tech from the info. Tech is an enabler. The brave provide enablers for value to be realized. [Chris Cooper]
8. One of the business models to consider is a multi-year service agreement which enables the customer to retain the cost savings i.e. you don’t buy equipment, you hire a service that contains the technology. [Simon Michell]
9. Certain smart city services like the clean city project can start approaching citizens, sometimes even through crowdfunding projects, where a big community participates and also encourages the administration to take part in it. At the end, public administrations pay for it as long as it brings a real value for them and citizens. [Francisco J. Gómez-Valadés Maturano]
10. Regardless of the approach, each case is different at this stage and does not roll up into a single category. The real challenge is, how do I evaluate a Smart City solution and determine the best business model. [David Sandel]
11. I am of the view that the cost of smart solutions will have to be borne by city residents, either in the form of initial infrastructure cost or the recurring cost of service. It is, therefore, important for the developing economies to simultaneously aim at economic development as one of the objectives in smart city planning. [Ramkrishna Sharma ]
12. If a project is economically viable, the private sector will be interested in building and operating the smart city initiative, with little or no upfront cost to the government. [Henry Chan, Ph.D.]
13. Pretty much all smart city action to date has been grant funded. It needs to move to business-as-usual. The key thing is for us to bring financiers into the conversation earlier, so they can help shape deals that are investable. My own view is that “Demand Aggregation” is a key element that creates the scale by which investors see a solution that is attractive. [Graham Colclough]
14. In the case of developing countries, the government controls most of the purse strings and the entities providing services tend to be public sector instead of private. So it makes sense for them to be government funded. The private sector would be skeptical to make a big investments before seeing government commitment. In the developed countries, the ecosystem is more complex. So sustainable business models needs to be developed for all companies to profit and to provide value to citizens. Governments can only provide a seed investment and a supportive role. Citizens need to be in the center of such planning, as the success of initiatives would depend on citizens’ perception. [Karun Chakravarthy]
15. Smart cities require smart city financing schemes … PPP for example.. or crowd type financing… The paradigm of one side bearing the burden and withstand the responsibility of the development. Now yet another BIG question then is would we be back to the inflation of the state machine.. is it technology providers that would subsidize the whole menage. [Slim Saidi]
16. Some interesting points made here for sure, but I take the attitude that Smart Cities should not be at a cost and a burden to either the public or private sector. Any provision should be affordable and efficient which in plain English means that the ROI should be within reason and acceptable levels. To attain this, those providing solutions in Smart Cities, Living, and/or Transport need to provide the technology at a cost that is both fair and reasonable.
17. The public sector should enable more and better environments, and the private sector should be mindful in keeping the pricing and thus profit margins at an acceptable level. [Charles Sellers]