Investors and smart cities: are there dangers lurking in the new urban shadows?

Rapid technology changes are promising investors the cities of the future will be greener and more inclusive than ever before. But some smart city funds have encountered problems, explains Chris Walker

Thanks to a variety of technological developments cities are changing fast. Enabled by the rise of the Internet of Things (IoT), an army of sensors are transmitting enormous quantities of real time data to city managers, transport operators and building owners. The application of big data and artificial intelligence promises to transform the city dweller’s experience. Many of the world’s capitals are declaring themselves ‘Smart cities,’ dedicated to the elimination of pollution, the reduction of congestion and the creation of a more inclusive environment.

In 2014, Copenhagen became the ‘European Green Capital,’ and declared itself a model for the green economy. Its goal is to reach carbon neutrality by 2025 delivered by strategically deploying smart city technology.

But the pace seems to vary hugely from country to country. I met with Alice Charles, smart cities expert at the World Economic Forum. She says: “Cities are moving at very different rates. Singapore and Seoul are way ahead. In Europe, Copenhagen, Paris, and Milan are advanced in taking action, and there’s a lot going on in London. Others have yet to even start.”

‘Technology issues, along with the myriad political hurdles, perhaps explain why investors’ smart city funds launched in recent years have encountered problems’

Gianluca Minella, Head of infrastructure Research at DWS says this is “because of the amount of collaboration that is required between different services to share data and roll out services. Political will and supportive legislation at a national level, and regulation at municipal levels [are both required] for smart cities to succeed.” These are two big ‘asks.’

In addition, Charles has a further word of warning – “Beware graveyard technologies. A lot of mistakes have been made in the past, procuring tech solutions incapable of scale. Silicon Valley created technologies without necessarily asking cities what they really wanted.”

Of course, it is possible for the new generation of tech entrepreneurs to do things differently. Stefan Plesser, the CEO of Synavision is very aware of “the failure of previous smart city technology projects. I myself worked on pilot projects run by specialist engineers and know how dangerous this can be. A pilot project can succeed when it is run by highly motivated research staff and then fail in the real world.” Instead of that, Synavision has listened to its clients and created a “digital twin” which enables them to carry out a “digital audit.”

Investors proceed carefully 

But these technology issues, along with the myriad political hurdles, perhaps explain why investors’ smart city funds launched in recent years have encountered problems.

Phoebe Smith, Senior Investment Director at Whitehelm (now part of Patrizia) launched such a fund in 2018. She tells me: “we quickly found out that this is still a developing ‘sector, and it has been a challenge to scale investments. There are plenty of pilot schemes around the world, but finding sizeable potential investments is a challenge.”

The solution for Smith has been a partnership with SiFi, which has “delivered real success for us by working as a developer in the US targeting tier two and tier three cities rolling out citywide networks”. Perhaps this is because “contracts are with the cities themselves and we work with them to understand the issues and solutions. We ask each city to list the top 10 problems, from waste collection to traffic management.” That’s a lot of political liaison.

Smith adds “unquestionably the first stage of smart city development is improvements in connectivity.” This is at least one area for some straightforward infrastructure investments. Gianluca Minella, at DWS agrees “the main focus for infrastructure investors is the provision of the digital infrastructure. We are involved in a Dutch/German datacentres platform called NorthC.”

But Minella also gives me something else to worry about. “A very important aspect of investing in data centres and digitalisation is to be aware of the amount of CO2 emissions which they emit. It has been estimated just to model a city’s traffic flows for a smart traffic project [generates] the equivalent of 620,000 pounds of CO2. This means some smart city projects that are thought to help the environment will be self-defeating if they involve a lot of data usage. It is my belief that these carbon emissions involved …will act as a cap on the roll out of smart cities.”

In addition to these concerns, Minella believes “for infrastructure investors the value generation potential of smart city projects…is limited by the fact that the majority of value in any upgrade of infrastructure goes to the strategic industrial company providing the technology, not the owner of the asset.”

Having said that, all the data gathering must provide investment opportunities. Right? The ‘digitalisation’ revolution sweeping European parking is a good example. Philippe Op de Beeck CEO of APCOA operate some 1.6 million parking spaces in 12,000 locations. “Our goal is to digitalise 100% of all parking transactions. In the Scandinavian countries they are already close to 70%.”

APCOA’s technology has great potential “It can also allow our clients to analyse customers. These can be in many sectors: travel, shopping, hospitals, education, hospitality. Through automated number plate recognition, we can provide them with all kinds of information.” For a retail client this might be “the likely profile of customers in terms of where the shopper comes from, or which income bracket they’re in”. Useful.

Privacy issues for smart cities

But Ruben Langbroek, Head of Asia Pacific at GRESB (Global Real Estate Sustainability Benchmark) worries about what all this big data can do. “The use of digital technologies [must be] responsible, ethical and sustainable… carefully managing the risks of harm.” He cites the work of the Sustainable Digitalisation Project (SDP). “Failure to effectively give users comfort around privacy could lead to reputational damage for real assets and their owners/managers, and reduced desirability to tenants, customers and investors.”

Alice Charles adds: “Clearly there is an issue with privacy of the data. We need legislation to make sure citizens’ rights are respected and to avoid human rights violations.” SDP cite five issues – privacy and data rights, but also cybersecurity, workforce transition and exclusion.

Charles feels “as sensory data points are rolled out it is important for developers to ask themselves who it is that the data is interacting with? Fortunately, increasingly tech providers are moving to ensure the interactions are made in a more inclusive manner.”

Op de Beeck says “sensitivities around data are an important aspect for the business. Our digital platform and use of data are fully compliant to the General Data Protection Regulation of the EU. Within that framework, our approach is to make the business case compelling and our services convenient for our customers. In that context, it has to be observed that many customers are willing to share their data.”

Christopher Walker is a writer on business and politics. He sat for several years on the asset allocation committee of a major asset manager