The future of smart cities – economic and technical challenges

The future of smart cities – economic and technical challenges

A competitive city needs to provide services that offer a high standard of living at competitive costs

Throughout the years there have been a plethora of articles written on smart cities - so why one more?

To start, this article offers insights on how greater adoption of technology can help solve many long-standing economic and financial challenges faced by traditional cities as they aspire to become smart cities. The challenges faced by cities, currently and into the future, are outlined along with the benefits and solutions to certain problems that technology can offer. The authors provide an overview of a smart city ecosystem and identify technical challenges that present potential obstacles to growth. In addition, the authors will provide guidance on what cities and governments can do to expedite the adoption of technology.

Urbanization trends

While we focus on the technology aspects of smart cities in this article, it is important to not lose sight of the larger social issues facing cities of the future. In fact, one could make the case that it is the hard reality of the statistics and projections of urbanization that should create a sense of urgency for governments and policymakers.

In many respects, the statistics and projections related to the rate of urbanization are daunting. According to the Organization of Economic Cooperation and Development (OECD)1, the percentage of the world’s population living in cities (with greater than 50,000 inhabitants) has more than doubled over a 40-year time period – from 1.5 billion in 1975 (37% of total population) to 3.5 in 2015 (48% of total population). By 2050, it is projected that approximately 5 billion, or 55% of total population, people will be living in cities.

While some cities will continue to grow, 20% of the world’s cities have seen a population reduction since 2000 and this shrinkage is projected to grow to 30% by 2050. These declining numbers are primarily concentrated in East Asia and Europe2.

While there are many factors that drive urbanization, such as lifestyle choice, the predominant factor is quality of life – including higher wages, better employment prospects, greater educational options, more social services, and greater access to technology3.

Even though the urbanization rate of growth is declining, the notion that 55% of the world’s population will be living in cities presents expectations of a higher standard of living and challenges for policymakers and cities to deliver relevant and quality of life-enhancing services.

In what follows, we argue that cities need to embrace technology to stay competitive, relevant, and meet the needs of its current and future citizens.

Financial challenges

Even without the above noted urbanization trends, cities have been under constant pressure to deliver many of the services that we consume on a daily basis (water, electricity, garbage collection, parks and recreation, safety and policing, and schooling amongst others) with limited sources of revenues and budgets.

While not exhaustive and recognizing that municipal revenues vary across countries, the most common sources of funding include:

  • taxes (properties, sales, land transfers, and excise taxes),
  • services (parking, construction permits, waste, utilities, and license),
  • fines and infractions (parking and traffic violations, public health, and public parks for example),
  • rental of municipal assets (land and building for instance), and,
  • transfers from other governments.

In addition to tight budgets, many municipalities are constantly criticized for being inefficient and effectively overcharging for services. Service demands continue to grow while revenue sources are difficult to increase. For cities to expand services, they either need to generate greater revenues from existing sources or to adopt user fees for new services4.

Municipalities are also constantly under competitive pressure to attract business and skilled labor. Successfully attracting companies that employ highly skilled workers can provide many benefits to a city. However, a competitive city needs to provide services that offer a high standard of living at competitive costs.

Technical challenges

The adoption of technology has the potential to offer an array of benefits to municipalities. However, before we can address the benefits of adopting technology, smart cities need to create and foster a collaborative and highly interactive technology ecosystem. This presents technical challenges and issues that are discussed below.

The traditional operating model for a city has been based on functionally-orientated service providers that operate as un-connected vertical silos, oftentimes not built around user needs. Under this model, digital programs are often not integrated, such that an operational decision made within each program will most likely involve replicating a decision that has already been made by another program - thus, wasting valuable resources, time and money. Vertical smart city frameworks also inhibit collaboration across different activities in the region. For example, a transport authority may invest in an advanced wireless infrastructure to support intelligent transport systems, but this infrastructure is then not reused for healthcare. This has irreversible socio-economic consequences and hinders economic development and environmental progress for local governments. The drivers of these conclusions include:

  1. Industries are not interconnected, and data cannot be shared across verticals
  2. Future operational challenges will be complex, costly and risky – there is no long-term approach that makes programs inefficient and not sustainable
  3. Solutions are not citizen or enterprise-focused
  4. Despite all the investment, there are still challenges to drive internal innovation

Connectivity underpins all the innovation in cities: energy, waste management education, transport and healthcare are just examples of areas that are adopting innovation in cities. Networks (fixed and wireless) support all the technologies adopted in cities to favour public and private sector services, and until now cities rely on service providers to invest in the infrastructure to support such digital transformations.

History with 4G and fibre has shown that without public sector intervention the telecoms market is slow to deploy infrastructure in areas which is not commercially profitable. Furthermore, added to the fact that the telecoms sector revenues have been declining over the last years, cities require a change of operating model, one that requires a strategic involvement of the public sector taking a leadership role of setting the building blocks to stimulate investment in a market that is currently expanding.

Cities are required to implement an integrated model that addresses cross-sector infrastructure strategy and gives the public sector more control and power to drive long-term strategic goals.

The benefits of embracing technology

As noted, technology has the potential to address many of the above-noted challenges facing local governments. For the purpose of this discussion, two types of technologies will be discussed – those that developed and used for internal back office5 purposes to help the city manage its internal operations, and smart applications that have the potential to offer new services to residents and local businesses.

Technologies for internal use include applications that primarily focus on making back and middle office functions more efficient through automation. One example of such an application includes artificial intelligence and smart algorithms to assist with human resource functions. Many private sector companies are using technology to manage virtually all aspects of the human resource process and life cycle – from hiring to year end evaluations. While it is not possible to automate all functions, those that have certain characteristics (high frequency of occurrence, repetitive, and labour-intensive) may be good candidates to be automated. Benefits from automation include lower cost of services, improved customer experience with higher quality services, productivity may increase, and morale may improve as less interesting tasks have been removed from day-to-day duties.

Another very interesting technology that has the potential to help municipalities is blockchain and smart contracts. According to Vitalik Buterin in a recent article6, the blockchain has the potential to help cities enhance trust and transparency through a more secure verification system for existing transactions. This article also presents examples of how the blockchain can be used to manage the ownership of municipal assets and to enhance governance. Interestingly, some cities, such as Reno, have already started to experiment with the blockchain.

Perhaps the technology that will have the greatest impact on cities are smart applications. This technology stands to offer an array of benefits to cities. For instance, they hold the potential for new services to be offered. This in turn can not only enhance the quality of life of residents and productivity of local businesses (including higher wages and a new type of employment) but it can also offer additional revenues to cities. Municipalities need to become more to start thinking more creatively to provide more value-added services and to enhance sources of revenues. Technology presents a venue that would allow cities to become more entrepreneurial.

Next steps and conclusions

Where do we go from here? While many cities have already started the process of adopting smart technologies the pace of change and adoption can certainly be enhanced – especially with respect to the provision of greater and less expensive connectivity. Other changes include the following:

  • Municipalities should develop a technology strategy and road map for future development. This will help cities better understand how technology fits into their strategic growth plans and how they see themselves in the short and medium-term.
  • Municipalities should consider partnering with the private sector on the development and management of certain technologies.
  • Higher levels of governments should pay greater attention to what is happening to cities and provide greater support. This could be beneficial for both levels of government – especially as many of the future voters will be residing in larger cities.

In conclusion, technology has the potential to offer solutions to many aspects of the challenges facing municipalities. The authors would urge regional and local governments to prioritize this initiative and to take action sooner than later.

Authors

Thomas Tsiopoulos

Thomas Tsiopoulos

Thomas is a retired Partner from Ernst & Young as of June 30th, 2021. From July 1, 2021, he has taken an Advisory role with Weaver Labs.

While with Ernst & Young (EY), Thomas has held several leadership roles. He was the leader of the Financial Services Transfer Pricing Practice in the United Kingdom (based in London) for EY from 2012 to 2014. Thomas returned to Canada to Lead the Canadian Transfer Pricing Practice until 2018. From 2018 to 2021 he was relocated to New York where he led America’s Financial Services Transfer Pricing Practice. Thomas also spent 6 years with KPMG in the Netherlands (from 1998 to 2004) and 6 years with the World Bank as a Public Finance Economist (1992 to 1998).

Thomas is a subject matter specialist and expert in several matters including:

  • Banking and Insurance, where he has served as a transfer pricing advisor to some of the world’s largest banks based in New York, London, and Toronto.
  • Supply chain restructuring, financial change, and tax optimization strategies. Thomas has assisted some of the largest multinationals to restructure their supply chains to gain operational efficiencies and to mitigate taxes.
  • Thomas has also worked with many multinationals to better understand operational and financial risk. While at EY he has helped develop a process that bifurcates risk from services and assets to potentially migrate risk within the organization and/or externally to the multinational to mitigate its financial impact on the overall firm.

Thomas holds a master’s in economics from the University of Western Ontario and a Master of Business (Finance) from the University of Toronto. He has published more than 20 academic and invited articles and was awarded the article of the year award by the Canadian Tax Foundation in 1998.

 James Arias

James Arias

James is a Co-Founder of Weaver Labs, where he contributes largely to the technical design and development of Cell-Stack and WireMQ, the core components of the decentralised network.

James has an academic background in applied mathematics, economics and computational science. James spent a number of years working at financial institutions in New York City and Toronto, where he implemented risk analysis software, and was a consultant for firms such as EY. He moved on from financial services to work on Web3 and cryptocurrencies and joined the King’s College London 5G Tactile Internet Lab to work on the implementation of 5G-related routing projects. 

James’ areas of expertise are:

  • Distributed systems and P2P Networks
  • Cybersecurity
  • Token economic models
  • Cryptocurrencies and ecosystem-based economies

1 OECD Urban Studies. Cities in the World: A new perspective on urbanization. Mimeograph, 2020. Pages 10 - 17.

2 Ibid. Page 11.

3 Ibid. Page 10.

4 For additional information on user fees for services see Richard M. Bird and Thomas Tsiopoulos. “User Charges for Public Services: Potentials and Problems”. Canadian Tax Journal, Vol 45 1997, pages 25 – 86.

5 For the purpose of this discussion back office is defined as administrative and support functions. These functions typically do not involve client-facing and typically involve activities that are compliance-oriented such as data entry, claims management, accounting, and human resources.

6 Vitalik Buterin. Crypto Cities. Mimeograph. October 2021.

The future of smart cities – economic and technical challenges

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