Digital financing platforms - a solution to finance smart city projects?

Digital financing platforms - a solution to finance smart city projects?

A few month ago I was starting to look a bit closer to the world of Fintech with the aim to identify new digital financing platforms providing access to finance for smart city projects, especially for small and mid-sized cities.

Over the time it became more clear that there is no easy solution available. What was clear from the beginning is that such solutions could only be applied to a certain kind of projects, namely energy efficiency / deep retrofitting and renewable energy projects, as they deliver a more or less predictable revenue stream from energy savings or produced energy. And this revenue streams are in principle suited to allow re-financing of upfront project investments.

While this might nevertheless look rather straightforward, digging even slightly deeper into smart city projects, how they are structured and resulting specific requirements, a lot of complexity becomes visible even without looking at the "pure" (re-)financing part.

Fast track: overview digital financing city platforms

A few month ago I presented an overview at the Covenant of Mayors Investment Forum. This was part of a panel on role of ESCOs for smart cities on behalf of the EU Smart City Marketplace. Presentation and recording are available at the CINEA website

• presentation here
• recording here

Below you find some details behind the presented slides.

Complexity of smart city projects

There is a lot of information available about smart city project challenges, solutions, structure etc and you can find relevant information, guidelines and reports at the EU Smart City Marketplace. Therefore I am just highlighting some key steps to give a perspective where digital financing platforms become relevant.

1. Foundation: Cities need to have a smart city strategy and plan
2. Start: Some first project development and public procurement is needed (sometimes even on the level of Pre-Commercial-Procurement PCP)
3. Project implementation, e.g. via an ESCO
4. Re-financing of ESCO - the moment the digital financing platform appears

In reality, financing needs to be considered early upfront in the process to ensure you have a bankable project at the end, but for the purpose of this article, I am not elaborating further in this. If you are interested in getting a feeling what planning means, here is a good article from Steven Fawkes.

Examples of digital financing platforms

I have to admit that this headline is slightly misleading as in reality there is not a single platform in operation - to my knowledge - which provides something similar to Jack Ma's 3 minute loan to smart city project financing. However, following my previous post, I have received a lot of feedback by mail or through long video conference exchanges. Currently I have structured them into three groups:

1. Credit
2. Blockchain
3. Project Platforms

This might look a bit strange and their is likely a better way of structuring it, but it has helped my thinking so I am using it here as well.

Credit

There are already some fintech companies providing a similar service than Jack Ma's 3-minute loan, loans up to 300.000 USD an SME can get within a few hours purely using an online service. But this are company loans and not energy efficiency financing by forfaiting. Examples are

• Ondeck, US: loan service for SME, access to finance within a day
• Forward Financing, US: working capital for SME, access to finance within hours, up to USD 300k
• Kabbage, US: credit lines up to USD 150k within minutes (own claim). Owner: American Express!

Blockchain

Well, blockchain always comes with a lot of buzz and it not always easy to distinguish between what really works (or can work) and what is just a nice paper. I have listed just 2. Both a in very early stage and I have not yet figured out completely myself how this will work.. or if it will work at all.

• EFFORCE: A lot of big buzz including a celebrity as a door opener, Apple co-founder Steve Wozniak. in principle they cover everything. After implementation of an energy efficiency project, energy consumption is tracked with smart meters delivering data to a smart contract for initiating payments. Projects get bundled and tokenized and everybody can buy such tokens (cryptocurrency WOZX) and benefit from regular returns. Tokens can also be traded on some crypo exchanges providing a secondary market and finally liquidity. Well, even if this all works, a lot of complexity obviously remains, see above steps 1-3.
• CommonsHood: A blockchan based wallet app to provide communities with instruments for financial inclusions. Covers topics such as access right tokens, crowdfunding or group buying. I have added it here as the crowd financing options miht in principle be able to provide financing for some smart city projects although that's clearly not the focus of this solution.

Project Platforms

Likely not a good name as this covers a broad range of projects and business in early phase all with different background and objectives. And they usually do not provide financing themselves but support the bankability of projects and/or help in getting access to finance. The list is clearly not complete but hopefully a good overview and starting point.

• TrustEE: Likely the most advanced platforms starting with some software supported project evaluation features up to a linked Special Purpose Vehicle (SPV) directly providing finance. Focus is more on industrial projects but in principle also applicable for smart cities projects.
• EEnvest: risk evaluation tool for energy efficiency investments in buildings
• eQuad: bridging platform for projects and investors
• ESI: project structure model platform including insurance (and using blockchain)
• SOURCE: software enabled project structuring and implementation platform, financed by regional development banks
• Optimised Retrofit: project delivering a procurement framework but also trainings, focus housing

Conclusion

No silver bullet.

Clearly financing cannot be seen in isolation and a 3-minute financing solution might not be available overnight if ever. Interesting to see that some platforms develop further starting to include more of the elements otherwise tackled separately by the different project platforms, e.g. TrustEE starts including green taxonomy and insurance solutions.

Blockchain can be an enabler as it offers a number of options for automisation bringing administrative costs down such as automatic transfer of data via smart meters to smart contracts sitting on blockchain initiating payments (sounds like EFFORCE, right?), but there are still many open questions such as data security and standards on oracle/smart contract level. Tokenization is a key feature of blockchain/DLT and can bring costs down and deliver liquidity. But cryptocurrencies are not yet as normal as fiat money.

SOURCE offers a very professional solution for cities and as it is software enabled and its processed are standardised. And standards were and will remain a key driver of accelerating investment flows into energy efficiency and also broader infrastructure related smart city projects.

Stay tuned

In case you are aware of any of such platforms, either concept stage, in development or already in operation, please just drop me a line to juergen.ritzek(at)ee-ip.org

In case this topic is of interest for you, I recommend you to sign up for our free monthly newsletter on FINANCE or DIGITALISATION or SMART CITIES